Outset Medical Inc (OM) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Onset Medical Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your host today, Jim Mazzola, Head of Investor Relations. Sir, please go ahead.

Thank you, and good afternoon, everyone. Welcome to the Outset Medical Fourth Quarter and Full Year 2021 Earnings Call. Participating from the company today are Leslie Trigg, Chair and Chief Executive Officer; and Nabeel Ahmed, Chief Financial Officer.

During the call, we will discuss our fourth quarter and 2021 operational and financial results, as well as provide our outlook for 2022. After our prepared remarks, we will host a question-and-answer Session. We issued a news release after the close of the market today and updated our investor presentation, both of which can be found on the Investor Relations pages of Outsetmedical.com. This call is being recorded and will be archived in the Investors section of our website.

I'd also like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events, market trends, results or performance are forward-looking statements. All forward-looking statements are based on our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the Securities and Exchange Commission, including Outset's latest annual and quarterly reports.

With that, let me now turn the call over to Leslie.

Good afternoon, everyone, and thank you for joining us to review our fourth quarter and full year 2021 results. Before I begin, I'd like to introduce and welcome Jim Mazzola, who recently joined us as Vice President of Investor Relations. Jim brings 2 decades of med tech and life sciences experience to our team, and we look forward to his contributions as we continue to grow our business.

The fourth quarter capped off a truly exceptional year for Outset during which we saw record revenue growth, meaningful progress towards gross margin expansion, success with our land-and-expand acute strategy and tangible growth in home console placements as evidenced by a tripling of our home install base. This momentum resulted in fourth quarter total revenue of $28.2 million, representing 63% growth year-over-year and resulted in full year 2021 revenue of $102.6 million, representing 105% growth year-over-year. Our business again proved resilient as we continued to grow through COVID-19.

Our success in the fourth quarter extended beyond revenue, with console bookings hitting a historic high. We exited 2021 with 1,251 consoles in backlog compared to 551 in backlog exiting 2020, with a significant portion of our 2021 exit backlog consisting of consoles intended for use in the home. This backlog provides us with significant visibility and confidence in our 2022 revenue trajectory.

As Nabeel will touch on in his discussion of our fiscal year 2022 revenue guidance, we are projecting another strong year ahead, with good visibility to continued sales growth within acute care customers and an inflection in units deployed for home use. In addition to growing the top line, we remain confident in reaching our gross margin expansion goals, specifically our 2025 goal to achieve gross margins of approximately 50%.

Turning now to a review of our success in the acute market. The fourth quarter and full year 2021 exceeded our expectations, with transformational progress in terms of new sales agreements, expanding within existing customers, and console shipments. Importantly, we saw our land-and-expand strategy validated as customers consistently expressed interest in expanding their Tablo fleets to new sites across their networks as they experienced the economic, clinical and workflow benefits that Tablo provides.

For example, one regional health system in the Southeast was paying nearly $400 per treatment with an outsourced service provider prior to adopting Tablo. Following a successful Tablo implementation, the hospital benefited from a 70% reduction in per-treatment cost and an estimated $6 million in savings over the past 3 years. The economic and operational benefits this health system saw with Tablo resulted in an expansion to multiple additional hospitals in their network.

In addition to Tablo's cost reduction benefits, we are also seeing recent adoption due to its ease of use, which has enabled some hospitals to recover from unexpected terminations of service from outsourced dialysis providers struggling with their own staffing shortages.

During 2021, we achieved our goal of signing sales agreements with 7 of the 8 largest U.S. health systems. Our team also successfully drove a meaningful expansion of our commercial footprint across the United States as we landed sales agreements with roughly 1/3 of the top 100 largest regional health systems, setting us up well for ongoing expansion in 2022 and beyond. This success enabled us to more than double the size of our acute install base while significantly expanding our backlog and setting a strong foundation for 2022.

In addition to our success generating new orders, we also continued to see Tablo XT's clinical value to patients and operational workflow benefits to nurses resonating with customers. This is evidenced by another quarter of strong XT attachment rate thanks in part to the clinical validation we received for XT through our XTEND study, which demonstrated an impressively low clotting rate of just 4% despite treatment times that averaged 23.5 hours.

Our commercial success in the acute market last year taught us that Tablo solves important problems not only for the nation's largest health system, but also for smaller hospitals with fewer than 100 beds. Given our strong traction in this segment of the market, which we had previously excluded from our TAM estimate, we now believe that our immediately addressable U.S. market opportunity for the acute setting is $300 million larger than initially projected, putting the total U.S. TAM at $2.5 billion.

I'd like to add that our success in these smaller hospitals is meaningful on a very human level, as well. Tablo is creating health access equity in often rural communities where patients may not have had or may be at risk of losing access to dialysis care. In states like Texas and Oklahoma, small hospitals have adopted Tablo to start offering inpatient dialysis to patients who previously would have had to travel hours away to receive care. We've also seen small hospitals use Tablo to in-source dialysis in order to preserve a dialysis service line their community members otherwise would have lost. We care about patients first and are proud to serve the need wherever and whenever it exists.

As we look ahead, we are only single-digit penetrated in acute, and we have a tremendous runway in terms of new customer acquisition, particularly as we're observing hospitals of all sizes seeing value in Tablo. We feel we are still just at the tip of the iceberg on the acute side.

A growing customer and install base in the acute setting directly feeds our home expansion strategy. In 2021, we took a deliberate approach to building our early home presence, focusing first and foremost on delivering an exceptional and highly differentiated patient and caregiver experience. Our second key objective last year was to build a solid operational foundation that was ready for scale from training to distribution and logistics to patient support any time of the night or day. Leslie is pleased to report the team achieved both of these objectives while tripling our home and clinic install base to 300 consoles and in ways that allow us to scale in 2022 with an inflection beginning this year.

After growing home revenue to mid- to high-single digits as a percent of total revenue in 2021, we expect our home revenue to more than double in '22, reaching mid-teens as a percentage of 2022 revenue. To achieve this level of growth, it is also our goal to exit the year with 100 home programs in place with both health systems and specialty providers.

I'm back. teamwork makes the dream work, as they say. Thank you, Nabeel.

Given that home consoles were a significant portion of our Q4 exit backlog, we believe we are set up well for strong velocity and volume in 2022. Additionally, macro factors in the home setting remain overwhelmingly in our favor. As we announced on our last call, we are very pleased to have received a favorable decision for Tablo under the TPNIES program following the submission of our application in the first quarter of 2021.

As a reminder, TPNIES stands for the Transitional add-on Payment Adjustment for New and Innovative Equipment and Supplies. Notably, CMS deemed Tablo a substantial clinical improvement compared to the incumbent device, making it the first and only dialysis technology to benefit from this new CMS rule. The TPNIES decision and the End-stage renal Treatment Choices, or ETC model, provide additional tailwinds we believe our sales teams will capitalize on in 2022.

Beyond our ability to drive revenue growth and build a foundation for the future, our team continues to make impressive progress on gross margin expansion despite macro headwinds. We reached fourth quarter non-GAAP gross margin of 12%, which was in line with our expectations. We're very proud of our teams across the business in how they've effectively managed through the macro supply chain and sector volatility during the quarter and the year.

On the supply chain and manufacturing side, our ongoing cost-down initiatives and programs continue to work for us, which helped drive sequential reduction in the cost of our console. On the cartridge side, we achieved an important milestone in late November when the FDA granted 510(k) clearance for a new Tablo cartridge.

This approval enables a second source to produce Tablo cartridges in Mexico with a new contract manufacturing partner in addition to our existing manufacturing partner in Southeast Asia. This clearance is an important milestone on our roadmap to continued gross margin expansion, as we expect previously elevated transportation and shipping costs to decrease as this new primary source of cartridge production in Mexico ramps up. Both this new source and our other ongoing cost-down initiatives are expected to contribute to long-term gross margin expansion. In addition to cost reduction, we believe this approval will better enable us to optimize our manufacturing process and mitigate current supply chain challenges around lead time, capacity and logistics.

In summary, we are very proud of our performance both in the fourth quarter and full year. Outset continues to deliver strong, consistent and predictable revenue growth and gross margin expansion. In addition, we successfully achieved the key 2021 strategic initiatives we communicated at the beginning of last year - expansion within the acute setting, foundation building for expansion in the home setting, increasing manufacturing capacity and delivering cost reduction initiatives designed to enable sustainable and profitable financial growth. These accomplishments are a testament to our exceptional team and the transformative technology we're delivering to reduce the dialysis burden for patients and all those who support them.

As we look to 2022, we have clarity and conviction around the growth drivers that will continue to distinguish Outset Medical, namely expanding our acute care business from the beachhead we established last year, inflecting the trajectory of our home business and meaningfully expanding gross margins. I remain very confident in our growth trajectory and our promise to dialysis patients and providers that better begins now.

Before I turn the call over to Nabeel, I'd like to share a story from our annual sales training meeting, which was held last month. As we do at every sales meeting, we invited several patients and nephrologists to speak to our group. Melvin and his wife of 46 years, Cleo, were 2 such individuals who had an enormous impact on our team. Melvin is a veteran with end-stage kidney disease, and he served our country for 23 years in the Air Force, including on the team responsible for maintaining Air Force One.

He was diagnosed in 2009 and began home dialysis in 2018 with a competitor's system. Cleo told us that training was difficult and that there were "binders of information" to assimilate and that it was quite overwhelming. So when Melvin's nephrologist approached the couple with a new option in April of 2021, they were eager to try Tablo. Cleo told us, "I simply cannot believe how much better Tablo is. Not only is disinfection easy, but setting up for treatment is so quick and simple to do." She said, "Tablo walks you step-by-step through everything on the touchscreen, and you never feel like you're lost." She describes moving to Tablo as a night and day difference.

Melvin said he likes all the time Tablo saves, time he and Cleo can spend doing more of the things they enjoy in retirement, including spending time with their 4 children and 9 grandchildren. We love stories like this and look forward to sharing more of them as we continue to grow and further expand in the acute and home markets in 2022.

And of course, none of the success we had last year would have been possible without the hard work and dedication to our mission carried out by everyone on the Outset team. And for that, I want to close by thanking all of our employees for their extraordinary work.

With that, I'll now turn the call over to Nabeel to review our financials and provide more granularity on our expectations and key drivers for 2022.

Thanks, Leslie. Hello, everyone. Our fourth quarter revenue grew 63% year-over-year to $28.2 million, driven primarily by increased console shipments to acute customers, higher consumable shipments, increased services to support our growing install base, and the impact of XT upgrades. Our full year revenue was $102.6 million, an increase of 105% over the prior year.

Product revenue grew 80% year-over-year to $23.7 million. Console revenue grew by 70% year-over-year to $18.1 million, driven by higher console placements and increased ASP, given the availability of and demand for Tablo XT. Similar to prior quarters, we continued to see better uptake of our XT upgrade than we had initially projected.

Consumable revenue was $5.6 million, an increase of 119% versus the prior year. We saw Q4 cartridge utilization in line with our expectations. Service and other revenue grew by 11% year-over-year to $4.5 million as we serviced the larger install base.

Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release.

Our fourth quarter gross margin was 12%, an improvement of approximately 9 percentage points versus the prior year period and a sequential improvement of 60 basis points. This improvement compared to the prior year period was primarily the result of our ongoing cost reduction activities related to moving our console manufacturing production to Mexico, which [had] meaningfully lowered console costs while enabling increased console output. Operating expenses in the fourth quarter were $39.4 million, up $13.6 million versus the prior year period, driven primarily by headcount growth resulting from investments in our commercial organization, investments in R&D, and G&A expenses tied to operating as a public company. Compared to the prior quarter, non-GAAP OpEx increased $9.1 million, primarily as a result of the investments we're making in our commercial execution and in R&D.

We reported fourth quarter GAAP net loss of $41.2 million, resulting in a net loss of $0.87 per share compared to a net loss of $32 million, or $0.75 per share for the prior year period. Non-GAAP net loss was $36.4 million, or $0.77 per share compared to a non-GAAP net loss of $25.8 million, or $0.60 per share for the same period in 2020. We ended the year with approximately $372.8 million of cash, cash equivalents, restricted cash and investments.

Moving on to our 2022 outlook. We project revenue for the full year 2022 to range from $142 million to $150 million, which represents approximately 38% to 46% growth over fiscal year 2021 revenue. Our guidance is grounded in the visibility afforded by our backlog of both acute and home consoles exiting 2021, as well as our pipeline. Our revenue guidance assumes an inflection in our sales to home customers. We expect that our sales into the home will double as a proportion of our revenue in 2022 compared to 2021, with a goal in the mid-teens as a percentage of total revenue for full year 2022. For modeling purposes, we assume revenue will grow in the mid- to high-single digits sequentially from Q4 to Q1 and then accelerate as we move through the rest of the year.

Moving to gross margin. We were very pleased with our sequential improvement in the fourth quarter and our year-over-year expansion, overcoming some of the supply chain headwinds we faced. We expect our gross margin to continue to benefit from our ongoing cost-down activities on the console, as well as the transition of our cartridge production to be primarily in Mexico. We have line of sight to non-GAAP gross margin expansion to the high teens for the full year 2022, more than a 2x expansion to 2021 full year gross margin. This forecast assumes some level of continued volatility and component costs, which we believe we have mitigated against, as well as the cost of freight, which we expect to taper in the first half of the year as our new Mexico-based cartridge manufacturer ramps up.

As we have said throughout the last couple of years, we are fortunate to have one of the best supply chain teams in the business, and we will continue to leverage our strong balance sheet to help ensure that we have enough materials and inventory on hand to service our growing demand. Our gross margin performance through 2021 and the structural changes we've made around our console and cartridge manufacturing give us continued confidence in our long-term margin expansion trajectory and in our path to get to roughly 50% gross margins in 2025.

Now, I'd like to turn to non-GAAP OpEx. Given our strong progress to date, the large market opportunity we see in front of us and the tailwinds we see in the home market, our intent is to continue to invest in our business to drive long-term revenue growth, ongoing gross margin expansion, and focused R&D to help ensure that our solutions remain in the leadership position. We forecast operating expenses to increase in 2022 relative to 2021 as we annualize the investments we made in 2021.

Next, I want to provide some color on our expected increase in stock-based compensation expense. We transitioned to being a public company in late 2020 and did our first real set of equity grants in 2021. As a result, our noncash stock-based compensation expense will be meaningfully higher in 2022 relative to 2021.

And finally, a quick comment on CapEx. Our facility in Mexico continues to be able to support our console manufacturing needs into the foreseeable future. We intend to make some scheduled CapEx investment into this facility to expand its capacity to keep up with anticipated demand. We expect total CapEx for 2022 to be in the mid- to high single-digit million dollars. Our progress through 2021 and our expectations for 2022 give us continued confidence on our journey towards breakeven profitability on a non-GAAP basis exiting 2024.

Thank you for your time. We look forward to providing an update on our Q1 progress during our next earnings call. Operator, please open the lines.

(Operator Instructions) Our first question comes from the line of Amit Hazan with Goldman Sachs.

I thought maybe what we could do is just start with the macro, and you gave some good color, but I want to just follow up on it and just ask about the supply chain and some of the issues there that have come up that I know investors are thinking about. So the componentry, it sounded like you've got your kind of hands around this. Implied in your comment, it suggests that if you think about your backlog or units you expect to deliver in '22, that you think you have the components you need to be able to deliver that. Just want to get a confirmation there. And then just as an aside separately on dialysate and the shortage that companies like DaVita are talking about, I think there's some confusion out there on the extent to which you guys are even exposed to that. Maybe just if you could spend a minute helping to clarify that, it would be helpful.

So let me maybe start with the first part of your question on the supply chain. So we've seen a couple of things happen over the last year. Number one, the component shortages, as I talked about, we do have one of the best supply chain teams in the business. We have leveraged our balance sheet to make sure that we have enough raw materials and components on hand. We also make sure that we've got enough Tablos on hand to service forward demand. So we are not concerned from a component perspective at all with respect to 2022.

The other thing we saw, and I talked about this in my prepared remarks, is the cost of freight, particularly as it related to transporting cartridges from Southeast Asia to the United States. Now, again, now that we have our Mexico-based cartridge manufacturer, they'll be ramping up here in the first half of the year. And so again, structurally, we've mitigated that situation, and we won't have these freight costs, going forward, anymore.

Yes. Maybe I can jump in on the second part of that. I mean, yes, we have been hearing about and reading about the newspaper the dialysate shortages, as well. We've certainly gotten our fair share calls from hospitals being put in a pretty difficult position by that. The short answer is we are open for business and anticipate being open for business well into the far future. We don't source from any of the providers I think that have been struggling with such shortages, and we haven't missed a beat. And so if anything, it has provided us with an opportunity to help out at a really critical time since we have been able to maintain a very, very strong continuity of supply.

And I'd just ask one follow-up, and then I'll jump back in queue. Just on the '22 guide, just thinking about folks still getting to know you all and thinking about the backlog that you [give] at the end of the year, 550 last year, maybe help us understand how last year's figure ended up materializing, how much of it and how fast, and if that informs how we should be thinking about the 1,250, how much forward visibility does that afford you? And then, just generally around visibility, as you think about the guidance that you gave, just the puts and takes on the low and the high end that you're thinking about for the year would be super helpful.

So 3 things there. So, one, we entered 2021 with 551 consoles in backlog, as you mentioned. Now, if you rewind the tape, we talked a lot about that backlog being very 1H '21 focused, right? The composition of that backlog and when our customers expected that backlog to deploy was really in the first half of '21. And you may recall that it sort of led to a large amount of growth concentrated in the first half of the year in 2021. So that's that.

When we look at the backlog we have entering '22, so we have 1,251 consoles in backlog entering '22, and backlog for us represents an agreement with our customers to take an order, it's a binding order, and then we work with them to determine the ship dates of that backlog, right? So the backlog of 550 entering '21 is very different from the backlog entering '22.

Based on the backlog we have entering '22, the 1,251 consoles and the visibility we have in our pipeline, we have a lot of confidence in the guidance range that we talked about, the $142 million to $150 million. We have a lot of confidence around the range, and it's supported by the visibility here that the backlog starts to provide.

Now, when you think about our guidance range, the $142 million to $150 million, we have baked in the fact that COVID has not really been a headwind for us. As Leslie mentioned, we've managed to grow through that. We've baked in the fact that nursing shortages have by and large been a tailwind for us. Again, as Leslie mentioned, we have seen situations where we have been able to step in where a hospital incumbent outsource provider has had their staffing shortages and been unable to service the customer, right? And so we have a lot of confidence, again, around the range. And look, we still have 3.5 quarters of execution left to go here in 2022. And so sitting here today, we've got a lot of confidence in the range afforded by the visibility given by our backlog and pipeline.

And our next question comes from the line of Josh Jennings with Cowen.

And I wanted to have just 2 questions on home opportunity. It sounds like you're really experiencing some meaningful momentum, and it was great to hear the guidance you laid out. I wanted to just get a better understanding of where Tablo is winning. Is it mostly new patient starts in home? Or are there competitive swap-ins going on? And also just whether or not the PD kind of burn-out patient opportunity is contributing to some of the momentum and how you're feeling about attacking those PD patients that have burned out and already on some form of home dialysis? And then, the second follow-up is just on the pandemic. Were you seeing in 2021 pandemic tailwind in terms of more end-stage renal disease patients choosing home hemodialysis, just staying out of the clinic being high risk and wanting a safer dialysis haven in their home?

Well, I'll start maybe from the top. You talked about where Tablo winning new patients or existing patients on a competitive home hemo device. I mean, the answer is both. I would be hard-pressed to give you any sort of precise breakdown there because each provider, some of them are pursuing slightly different strategies. But I would say, by and large, most providers adopting Tablo are doing so to grow their total home population, to expand it. And they're purchasing Tablo because they believe that Tablo's ease of use, time savings, fewer supplies, will result in more patients saying yes to home.

So I would say that some of our patients at home today have been on an incumbent technology in the past, like the couple that I mentioned on the call earlier, but probably the majority are new to home as providers are looking to grow their total home population as a result, I think, also of the ETC and also the TPNIES benefit associated with Tablo.

You'd also mentioned the PD, the population of patients kind of off-boarding from PD. I'd like to be able to say early innings. I think we're whatever comes before the early innings. We are pre-early innings. We have, I think, always viewed a PD transition to HHD on Tablo as a really fantastic and obvious opportunity for patients to be able to stay at home, and I do anticipate in the coming years that we will invest in more patient education and more transition programs. But for today, we're really focused on helping our providers do what they want to do, which is grow their HHD population.

Lastly, on the COVID and has the pandemic served as a tailwind, I would say qualitatively, yes. When you talk to patients, and again, very anecdotally, you will hear many of them say, yes, this started to really sort of enter my equation about dialyzing in a center versus dialyzing at home. But thus far, we haven't necessarily seen or generated any hard and fast data about how many and how quickly. But anecdotally, absolutely, that comes up all the time, at least in the conversations that I have with patients about why they're choosing home.

And our next question comes from the line of Suraj Kalia with Oppenheimer & Company.

Nabeel, the commentary implies approximately a $20 million to $22 million home hemo contribution in FY '22. If I just do back of the envelope calculation, a little over 500 home hemo patients expected for FY '22, up from, let's say, around 175 or so in FY '21. How off is my math on this?

Suraj, I mean, I don't want to comment on the specific number, and that's not something we want to guide to. But what we did say is that our home revenues will more than double to get to this mid-teens as a percent of '22 revenue. And so your math tracks to that statement. Now, we'll publish our install base annually. We'll do the same thing next year when we print Q4 '22 results, but your math tracks.

When I look at the bell curve of distribution, especially in the acute centers and the 1,250 consoles and backlog; to the extent that you can, help us understand how the bell curve looks like, because you all did have some pretty big contracts from some concentrated users. And I'm curious how you're seeing the bell curve. Is it widening? Is it narrowing? Any idea about recurring revs from acute centers would be greatly appreciated.

And I'm going to assume that, by bell curve, you're really maybe referring to the install base and facilities and customer expansion, et cetera. I guess my first comment would be, in 2021, the expansion was both wide and deep. So in that sense, I would call -- if I'm interpreting your bell curve analogy correctly, and please jump back on the line if I'm not -- but if I'm interpreting that correctly, yes, the bell curve is getting wider. What?

Just the utilization bell curve per center, and then how does the bell curve look like? Or how is it shifting?

Suraj, let me maybe take a crack at that. So if we look at our utilization in Q4 -- and just let me back up a little bit. So, internally, we look at utilization at spot rates, spot utilization rates. But what we're really focused on is trailing 12-month utilization because it gets sort of rid of some of the noise. When we look at our utilization across our portfolio or across our install base, things are trending right in line with where we expect them to be.

Now we're growing. And so as you can imagine, the new facilities that we're adding start out at lower utilization rates, and the more tenured facilities, they end up above where sort of the midpoint utilization is, if you will. On balance, in a growing environment, it all sort of works out. But from a utilization perspective, we're trending right in line with where we expect across the portfolio, both in the acute and for the consoles in home. Did that answer your question?

And our next question comes from the line of Rick Wise with Stifel.

Plenty of congratulations on the excellent quarter. Leslie, I'll congratulate you on your new title and hiring one of the best IR professionals in the business, a great move.

Turning to a question on acute, single-digit penetration, the land-and-expand strategy. I was wondering if you could maybe just expand on your comments there. What's the '22 agenda? Is it more about signing big new systems? Is that going to be the news we're looking for? Or is this you're landed enough, '22 is more a year of expand to drive growth in Tablo adoption. And rephrase the question however it makes sense to you, Leslie.

Yes, sure. Thank you, Rick, and thank you for the compliment to Jim. That's very kind of you.

Well, I guess I would say, and I sort of started down this road with Suraj's question, which is if you look at sort of the bell curve from a customer concentration standpoint, the spread is getting wider. So we are proliferating Tablo usage not only with new customers, and also with new facilities within those existing customer networks. Tablo today is now used in almost every state in the country, including Alaska and Hawaii, something we're really proud of.

But I think I used the verbiage "tip of the iceberg" because, when you look at the performance in '21, which was great, and we're very proud of it, also on an opportunity set of $2.5 billion, there's a lot of runway there to go. And so, said differently, the runway that exists both in new customer acquisition. There's a lot of hospitals that could benefit from Tablo, as well as expansion within the customer, both the regional health systems and also certainly in those national health systems where we have sales agreements, but some are still somewhat in the process of implementing and installing Tablo at more and more of their hospital facilities. So both deep and wide, to answer your question.

Got you. And my home-related question, just responding to your use of the word "inflection", strong language. What's giving you so much confidence now? I mean, obviously, the numbers look good. It's still very early on. But here, too, can you discuss next steps in logistics? And again, this time next year, I guess, have you doubled the number of home programs? Is that what we're looking for? Or no, it's focus more narrowly and drive patients and sort of get more confidence in your logistics and team and everything. Again, how are we thinking about priorities there?

Well, and I think I said this on past calls. I mean, I have always personally believed in doing things well not quickly no matter what market we're serving, but particularly at home, where the device-company-patient relationship is especially personal and obviously paramount.

So here's sort of the bottom line entering '22. We took a hard look at everything we strove to ready for scale during 2021 and determined we're there. We are prepared to grow both well and quickly. And so that's kind of the inflection in our thinking and in the velocity and pace that we think we can we can approach home with in 2022.

Second, I'd say that TPNIES and the ETC has accelerated the urgency with which progressive providers are moving to grow their home populations. And that's continued to change in a good way a bit, too, which has colored sort of our bullish expectations for '22.

So we're ready. I think a year from now, to hit the last part of your question, we'd want to be able to come back and report that Tablo was in robust use at 100 home programs across the country. We'd want to be able to come back and report, as we can report today, high retention rates, highly differentiated retention rates. And I think we'd want to come back and report that we were ready to kind of further push the accelerator down for 2023. So that's what we're going to be focused on reporting back to you this time next year.

And just one last one for Nabeel. Nabeel, you were kind of to give us a little color on the quarterly revenue flow throughout the year. Maybe you could help us on the gross margin front, as well. Clearly, you're heading towards higher teens, if I'm understanding as you exit, or by the time you reach the fourth quarter. But do we see steady pickup? Is it a sharper step-up fourth quarter to first quarter, or slower start because the program's cost or volumes pick up? How do we think about that flow?

For sure, Rick. So on gross margin, just a couple of things. Number one, the drivers of margin expansion for us, number one will be, so, on the console side, our cost-down programs that have benefited us in 2021 will continue throughout 2022, which is where we're looking at suppliers, components and individual parts to redesign them to drive down costs. So number one, that's going to continue. Number 2, we now have our Mexico-based cartridge manufacturer who is ramping up. And so you'll see that ramp primarily over the first half of the year where they go from 0 to the majority or from close to 0 to the majority of our cartridge production.

So when you take all of that together, what we would really look for, Rick, is gross margins to expand sequentially as we move through the year from the levels that they were at in Q4. So from the 12% we just printed, we'd see expansion. Now, the commentary I gave, our margin expectation is that, for full year '22, our gross margins will be in the high teens.

Possibly suggesting you end up later in the year a little higher.

And our next question comes from the line of Danielle Antalffy with SVB Leerink.

Congrats all around on a good year, Leslie on your new role. And Jim, welcome to one of the more exciting small-cap growth stories in MedTech.

Leslie, my question is going to be similar to the question I feel like I ask every time, and it's why not bigger, faster with home adoption? As you know, we did a lot of work on this back in June-July timeframe, and it just feels like all the tailwinds are in place. I appreciate the guidance you're giving for the year and wanting to be conservative. But I guess what's the tipping point? At what point are we at a tipping point where the avalanche really starts to come here?

Well, I think, first and foremost, as I look out to 2022, sort of doubling our revenue contribution coming from home, I mean, I think it's a big deal. We did quibble over words, but I think it's something that we're excited about, and we're bullish. I think that is bigger, and that is faster. So I think we're there. And we're going to reach for bigger and faster for the next many years to come. I don't see us slowing down this thing.

We will always have our eye on the patient experience at the same time. And we talked about this a lot. I mean, I really have had my eye on patient retention in the home really since day 1, studying this market for a very, very long time. In the IDE, our patient retention rate was really high. In our early experience with small number of patients, our retention rate was really high. And I think the question through last year, at least in my mind, was, hey, as we really start to scale here, will the patient retention rate remain high? The answer to that is yes. So I think that we feel very confident now about our ability to do bigger, to do faster and to do it well, again, it's defined by an exceptional patient experience, which is, at the end of the day, what this is all really about.

And then, I guess my next question is your go-to-market strategy has been focusing on the health system. Just curious about whether you're getting interest from other sort of major dialysis providers out there, and at what point you might sort of entertain that idea of going out to a DaVita, for example.

Sure. Danielle, are you talking about on the home side or the acute side?

I'm sorry, on the home side...

On the home. Well, a couple comments there. I think that Tablo is already being used by many of the major dialysis providers across the United States in addition to health systems that are establishing their own home service dialysis chronic service lines for the first time. So those are the segments that we're engaged in right now, and I don't see that changing. I see both growing equally. And if you, again, look at the size of our backlog, I think the demand and the interest in Tablo was equally high, both from health systems and also from conventional dialysis providers.

I think as our goals, to use your words, are really focused on bigger and faster, our partners, for today and for the foreseeable future, will be with those that want to be progressive and those that want to move really fast. And so those are our North Stars that guide us to partner selection. And I see that remaining intact for 2022.

(Operator Instructions) And our next question comes from the line of Drew Ranieri with Morgan Stanley.

Maybe for Nabeel. Just on OpEx, I heard that you said that you're expecting an increase year-over-year. I was just hoping that you could put maybe a finer point on kind of where you're expecting OpEx to shake out, and maybe what investments you're kind of putting that money towards? Is it more on the commercial side, more on the R&D, and how that might translate into catalysts over the next 12 months?

So first of all, OpEx, we invested in 2021 in our commercial organization. And in R&D, we hired a Chief Technology Officer, as you know, back in the summer. And it is this investment that we believe has helped get to kind of the demand that we've seen and the large backlog that we enter '22 with. Now, Leslie talked about all of the tailwinds that we see both in the acute setting, where, again, we still have a lot of penetration to go in an even larger market, right, $2.5 billion market. And then in the home, we are still in early innings and in a year where we do expect inflection and do expect home to double as a proportion of our revenues.

So our '22 investments will be primarily in our commercial organization around marketing, around clinical sales and around support of our growing installed base. So that's on the commercial organization.

And then, secondly, on the R&D side, we will continue to make investments there around hardware engineering associated with driving down costs and improving Tablo, and then around software and data with respect to our strategy to innovate around data over the long run. You'll see some smaller investments in G&A, but those will largely moderate in '22. We've made the bulk of those in 2021. Now, to put a finer point on it, Drew, if you think about our '22 OpEx as our Q4 run rate times 4, you're in the zone.

And then maybe just a longer-term margin question. But I think you said you're still anticipating 50% gross margins by 2025. But kind of given the commentary that home is kind of moving from a gradual build to something more of an inflection point in this year, should we be expecting something higher than 50%?

Drew, we still believe in our long-term target of getting to roughly 50% in 2025. We're sitting here 1.5 months into 2022, and so there is still a long way to go from here to 2025, and our progress to date, as well as our expectations for margin expansion in '22, give me confidence in that journey. I don't know, I'm not prepared to say we're going to go above 50% at all. But what I will say is I have a lot of confidence in our ability to go down this journey, given that we have a little under 3 years to go here.

Got it. And sorry, just one last one on XT. Can you maybe talk about what you are seeing in terms of attachment rate and maybe what your 2022 guidance implies?

Yes, Drew. So we've always said that we expect XT to be round numbers in 1/4 of the consoles we sell. We have seen strength, meaning we have seen higher uptake than that over the last couple of quarters here. We do think, over the long term, XT will likely converge at that roughly 1 in 4, but we have seen strength in the last couple of quarters.

And this does conclude today's Question-and-Answer Session. And I would like to turn the conference back over to Leslie for any further remarks.

Thanks, operator, and thank you all for joining today. Have a great afternoon or evening, depending on what time zone you're in. Thanks again.

This concludes today's conference call. Thank you for participating. Everyone, have a great day.