Q1 2024 Outset Medical Inc Earnings Call

Participants

Jim Mazzola; VP, Investor Relations; Outset Medical Inc

Leslie Trigg; Executive VP, Marketing; Outset Medical Inc

Rick Wise; Analyst; Stifel

Shagun Singh; Analyst; RBC Capital

Ray Talbot; Analyst; BTIG

Kristen Stewart; Analyst; CL King

Suraj Kalia; Analyst; Oppenheimer & Co Inc

Stephanie Lomibao; Analyst; Bank of America

Joshua Jennings; Analyst; TD Cowen

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Outset Medical Q1 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded, and I would like to turn the conference over to your speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead.

Jim Mazzola

Okay. Thank you, and good afternoon, everyone. Welcome to our first quarter 2024 earnings call here with me today are Leslie Trigg, Chair and Chief Executive Officer, and the BLM ED, Chief Financial Officer. We issued a news release after the close of market today, which can be found on the investor pages of outset, medical.com. This call is being recorded and will be archived on the investor section of our website. 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.
These statements relate to expectations or predictions of future events are based on our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. 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 our public filings with the SEC, including our latest annual and quarterly reports.
One quick note before we get started and the deal is feeling a bit under the weather today. So I'm going to cover the financial section in our prepared remarks and to be here with us, and we'll handle Q&A as normal.
So with that, let me turn the call over to Leslie.

Leslie Trigg

Thanks, Jim. Good afternoon, everyone, and thank you for joining us with our most challenging recent headwind now behind us with the FDA clearance of Tableau card demand for Tableau that has never been higher 12 consecutive quarters of gross margin expansion, a strong recurring revenue model that represents more than 50% of our total revenue tipping point adoption in the acute strong home growth with an industry-leading patient retention rate and significant decisive steps now taken toward reaching cash flow breakeven without needing additional capital assets.
Outlook and conviction in its future has never been stronger earlier this week, we announced the receipt of FDA clearance for Tablo cart with pre filtration ahead of our guidance for clearance during the second half of the year. I want to thank the incredible cross-functional team here at outset that accomplish this milestone. Capital card provides another unique differentiator to Tableau's ecosystem, and we look forward to the impact we expect it will have during the remainder of the year.
In terms of quarterly performance, we delivered revenue of $28.2 million in the quarter, which was lighter than we had originally anticipated due primarily to ongoing headwinds from the Tableau cart ship hold and some associated orders again being postponed out of the quarter with the clearance of Tableau cart. This factor is now behind us. Additionally, several customers experienced disruption from the Change Healthcare attack, which slowed reimbursement payments and resulted in several of our customers deferring both treatment and console purchases until their cash flow normalize. We believe this factor is now behind us as well as evidenced by treatment ordering in April, rebounding to expected levels.
Taking a step back over the past quarter we reflected on the complete alignment between our desire and data shareholders to reach cash flow breakeven more quickly and with the cash already on hand. And as a result, we took action, we undertook a meaningful restructuring of the business, which we anticipate will reduce our cash use through 2027 by over $100 million and reduced our 2024 non-GAAP OpEx by roughly 20 million. As a result, we expect to reach our profitability goals sooner than previously projected and without the need to access the capital markets to get there. Importantly, our cost reductions were carefully planned to Protect two key goals.
One, continuing to meet or exceed the expectations of patients and customers into achieving our long-term revenue and gross margin expansion guidance. To be very clear, we do not anticipate the restructuring to have an impact on our near term or long-term ability to grow revenue and expand gross margin in fact, we believe our ability to exceed our gross margin goals as we have today will continue to play an important role in our path to profitability, head count reductions, CapEx and associated program spending in R&D comprise the largest portion of the savings prior to making this decision, we were investing heavily in hardware and software engineering projects with long development time horizons given Tableau's already deep and wide proprietary technology moat, we are refocusing our dollars and energy on penetrating our $11 billion US market opportunity with the Tableau we enjoy today.
We are not sacrificing projects required for longer term, though, but rather pacing those programs to more closely match the longer time line in which we believe they will be important to our product and technology needs. Additionally, we examine ways to reduce management spans and layers where it did not affect the customer experience and revisited plans to expand overtime internationally. Determining that our focus over the long-range plan period should remain in the largest dialysis market in the world, the United States. As a result of our restructuring, we expect to reach cash flow breakeven several quarters ahead of our prior estimates without the need to access the capital markets.
Why are you reaching breakeven at a high level? We continue to see patients and providers benefiting from the differentiated clinical, operational and financial advantages, Tablo and deliver. Our moat is wide and deep with proprietary in-sourcing know-how, a differentiated technology platform, actionable data, EMR, interoperability, service excellence and regulatory experience through our successful clearance of nine five 10-K during the past nine years.
As a result, the universe of providers and patients experiencing the advantages Tablo can provide continues to grow. We also generated additional momentum with skilled nursing and sub-acute providers and grew an already record pipeline of opportunities in the acute care setting. We believe this momentum sets us up well for a strong year and supports the confidence we have in our financial guidance for 2020.
On the operational front, our efforts to replace the silicone tubing and Tablo consoles with TCDA. three material is substantially complete. Looking ahead, we are in the process of completing one additional field action near term to upgrade capital for powersports. We are proud of our collaboration with SCA across the board and look forward to continuing our partnership with them.
As we look at progress in our end markets, beginning in the acute care setting. Our focus on enterprise selling and dialysis insourcing has continued to elevate the financial benefits and strategic importance of Tableau to provider customers. Even with the first quarter being historically lighter for new console placements. We made good progress expanding within health systems.
We landed in 2023 and continued to build and advance our pipeline of opportunities nationwide more than 60% of our acute pipeline consists of deals greater than 1 million each and more than half of our total acute pipeline represents new potential customers. One of our key new customer wins during the quarter was a hospital in the Southwest associated with a large health system like many other customers. This provider with facing increased costs and inadequate service levels from an outsourced dialysis provider and wanted to take charge of their dialysis programs in partnership with the hospital's Chief Financial Officer and Chief Nursing Officer.
Our team was able to demonstrate the compelling financial clinical and operational advantages of an insource program with Tablo, which resulted in an early termination of their contract with the outsource provider. Several of these consoles are equipped with our Tableau Pro plus software for use in the ICU, which continues to have a strong attach rate across consoles shipped in the acute setting. And this customer is also taking advantage of our bridge program to assist with their rapid program standards.
The summary here is we continue to feel very good about the opportunity and our momentum with acute care customers. We forecasted a softer first half of the year as we manage through an elongated sales cycle and work toward five 10K clearance of Tableau carbon-free filtration. And that's how the quarter played out and with Tableau card now cleared for sale, we continue to anticipate growing into our guidance range as we move through the year as we have grown and built scale, particularly in the acute setting. Our recurring revenue business model continues to distinguish itself, anchor our guidance for the future and support our drive to profitability.
Turning now to the home and market our progress in the quarter was highlighted by the multiyear agreement we completed with US renal care. We've talked on previous calls about our two tiered home penetration strategy, which entails partnering with Progressive mid-sized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of health care providers offering home dialysis. U.s. Renal Care is the largest of the progressive MBOs and committed to accelerating home dialysis with Tablo.
Our initial home programs with US Renal Care have been very successful, and our early direct-to-consumer marketing has revealed strong interest in many other areas of the country previously underserved by viable home hemodialysis option. We also see an opportunity to help patients transitioning from peritoneal dialysis. Pd related infections are a major cause of dropout for patients who initially chose home dialysis, creating a seamless transition from PD. to HHT. enables patients to maintain the control they enjoy at home where many report higher quality of life advances we are making with home providers are driven by the fundamental differences Tablo can provide for their patients. For example, during the quarter, we continued to see our already strong patient retention rate continue to improve. Patient retention has been the Achilles heel of the incumbent home hemo system and our prior attempts to keep patients dialyzing at home. Our most recent data shows that 90 plus percent of patients who dialyze at home with Tableau remain on treatment at 90 days. This is a nearly 40% improvement over the 90 day retention rates for the legacy home hemo systems as cited in the last USRDS reports.
Additionally, we continue to see controllable attrition of patients on Tablo remaining in the low single digits, which we believe to be well below historical data for home dialysis to work patients, caregivers, providers and payers all need a technology that is easier to set up to maintain and to trade-off. And this is exactly what Tableau delivers in terms of our efforts to increase channel access and expand the provider universe. We added a new provider of size in the Midwest, a strategic regional NDO. in the Northwest and several new home only providers. Our top of the funnel progress in Q1 also included ongoing expansion within one of the largest and fastest growing sub-acute providers serving more than 60 facilities in the US. This provider partners with skilled nursing facilities to offer on-site dialysis treatment to residents, which deliver substantial benefits to the SNIP operator by reducing the risk and expense associated with transportation to an outsourced dialysis clinic.
More importantly, this approach can provide a life-changing benefit to residents who often spend eight to 10 hours a day being transported to a clinic waiting to dialyze treating, and then finally, returning home as often missing meal medications or other therapies and adequate rest. As a consequence, after our initial rollout with this provider early last year, the program has grown significantly and now includes more than 200 Tableau consoles with the potential to continue to grow substantially during the next several years. Importantly, this new model for dialysis reflects a broader trend of providers seeking to enhance patient care by offerings in Health & Home dialysis services.
Our results across home, acute and subacute continue to highlight the strength of our recurring revenue, which increased 24% over the first quarter of 2023, driven by consumable sales to a larger and growing fleet of Tablo consoles and a very high renewal rate for Tablo service contract. This recurring revenue stream continues to provide us with visibility into a large portion of our 2024 and longer term financial guidance. As a reminder, Tableau's in the home generate roughly $15,000 per year through their useful life. Tablo is in the acute setting, generate roughly $20,000 per year as there are more treatments performed on each device in the hospital and with a single patient.
Before I turn the call over to Jim, I'd like to reiterate a few key points about the quarter. First, we understand the importance of execution this year and remain confident in our plan. The foundation is in place to grow through the year with the return of capital parts, the continued expansion we see in our pipeline, the success we've had with new home providers and the strong adoption of Tableau within our large base of acute care customers.
Second, our entire team is focused on the drive to profitability. We demonstrated that commitment through 12 quarters of consecutive gross margin expansion to the 31.1% non-GAAP gross margin we reported today.
In addition to the operating leverage we are demonstrating and the actions we took this quarter that we believe will lead us to reach cash flow breakeven several quarters ahead of schedule and without the need for additional capital. And finally, the business model remains strong and our value proposition compelling. We've made the investments in hardware, software, analytics, manufacturing and a nationwide service infrastructure that all scale well as we grow this business with recurring revenue now consistently exceeding 50% of total revenue and gross margins continuing to expand, I am more confident than ever of the value we can deliver to providers, patients and shareholders well into the future.
With that, I'll turn it over to Jim.

Jim Mazzola

Thanks, Leslie, and hello, everyone. Revenue for the first quarter was $28.2 million, while below our expectations. Revenue was aligned with the quarterly build for 2024 that we guided to during the third and fourth quarter 2023 calls. The decrease was driven by a decline in product revenue, which was 20.4 million in the first quarter, a $2.5 million decrease from the fourth quarter. Service and other revenue increased 7.7 million, up slightly from the 7.6 million we recorded in the fourth quarter. Counsyl revenue was $9.2 million and consumable revenue was 11.2 million.
As Leslie has already discussed. We believe the drivers of this shortfall relative to our expectations, the impact of the Tableau card regulatory hold and the Change Healthcare cyber attack are now behind us, we were encouraged to see our council ASP. remained strong across all care settings as a result of our disciplined pricing and strong uptake of Tableau Pro plus offerings with a few customers following the end of the quarter, we saw a strong April month for treatment. Sales and cartridge utilization over time continues to perform in line with our expectations.
Before moving to gross margin and operating expenses, I want to highlight the initiatives we undertook during the quarter to restructure our 2024 and longer term spending budgets with the goal of reaching cash flow breakeven without the need for additional capital. Included in our GAAP results is a net charge of 2.5 million that we took in the first quarter associated with the restructuring charges comprised of severance and related benefits, offset by the reversal of bonus accruals related to impacted individuals. We have outlined the impact of this charge across our P&L in the tables that accompany our earnings release. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release.
Now moving to our first quarter gross margin and operating expenses, which, as a reminder, reflect our non-GAAP results. Our first quarter gross margin outperformed our expectations at 31.1%, a more than four percentage point sequential improvement from the fourth quarter and a more than 10 percentage point increase from the first quarter of 2023. Gross margin expanded for the 12th consecutive quarter, driven by a nearly 350 basis points sequential quarter expansion in product gross margin to 39.8%. That was partially offset by service and other gross margin of 8%. As expected, service and other gross margin expanded in the first quarter due to investments that we made in the fourth quarter and I previously described.
Operating expenses of 35 million declined 4% as compared to the fourth quarter and 16% from the prior year period, driven by the expense reductions we undertook in the fourth quarter. Non-gaap net loss in the first quarter was $29.3 million, or $0.57 per share, slightly lower than last quarter and 6.1 million or $0.15 per share less than the first quarter of 2023. We ended the quarter with approximately $230 million in cash. Cash equivalents, short-term investments and restricted cash, which we expect to fund operations to cash flow breakeven.
Turning now to our outlook for the full year 2024, we are reaffirming our revenue and gross margin guidance today, starting with revenue, we continue to expect a range of 145 million to 153 million as travel card comes back online. We do anticipate some ramp time to reengage on customer opportunities, revised contracts and schedule installations.
As a result, we anticipate Q2 revenues to be in the low 30 million range with the full benefit of Tableau cards return and the lapping of the elongated sales cycle coming in the third and fourth quarters. Our strong and growing recurring revenue stream provides us a lot of confidence to achieving the second half ramp with roughly 50% of second half revenue expected to come from recurring revenue. The remainder of second half revenue would require console sales to be roughly in line with quarterly Counsyl revenue just prior to the Tableau card ship hold, which we believe is achievable, particularly given the substantial growth in our acute and subacute pipeline during Q1.
Turning to gross margin. With our continued gross margin outperformance, we have increased conviction in our guidance for 2020 for non-GAAP gross margin for the full year, we expect gross margin to be in the low 30% range exiting the year in the mid 30% range for the fourth quarter of 2024 again, gross margin expansion is driven by Counsel cost-down programs, recurring revenue from a larger installed base and service leverage.
Turning to OpEx for 2024 as a result of the actions we have announced today, we now anticipate that OpEx for 2024 will be 125 to 130 million. And finally, our long term guidance with our strong value proposition across two large end markets, our wide competitive moat and our broad integrated offering of products and service. We expect annual revenue in the high 10s between 2025 and 2027. We continue to expect that our ability to expand gross margin on an annual basis will be linear from our 2024 exit goal of mid 30% to our 2027 exit goal of 50%. We plan to invest in our cost-down programs for both Counsyl and cartridge, and we continue to see recurring revenue growth and service leverage. We also expect that the spending cuts we're making in 2024 will add roughly another 10 million in savings in 2025 across COGS, OpEx and CapEx.
As a reminder, our business does not require large amounts of CapEx, which we expect to be in the low single digit million range annually through 2027, we have further opportunities for even greater savings if gross margin continues to perform better than expected as a result of our work to realign our spending and with our anticipated levels of revenue growth and gross margin expansion. We anticipate reaching cash flow breakeven several quarters earlier than previously expected without the need to raise additional capital. The steps we've taken to further adjust.
Our spending are logical and well prioritized, allowing us to continue to deliver an unmatched customer experience as we accelerate our drive to profitability. We remain bullish on the tailwinds in the business and the wide and deep moat we have established with Tableau for all of which gives us confidence in our outlook for 2024 and the longer term. And with that, I think we're ready for Q&A. Operator, please open the lines to.

Question and Answer Session

Operator

(Operator Instructions) Rick Wise, Stifel.

Rick Wise

Your line is open and good afternoon, everybody. And let me start with putting Tableau on I'm sorry, with Tableau card, and I'm going to ask just a multipart aspects of you've touched on it a little bit, but specifically the Jim or Jim Nabeel or how can it his name.
Now, as I said, it's going to take some time to reengage and there's work to be done to install, but Leslie, maybe you can talk to us about are there orders in hand or are you ready to manufacture and ship to meet those orders in the second half? Can you quantify at all it, I mean, is, quote the upside from having Tableau cart in hand, Tableau card sales specifically or no, it three's conversations and it's going to pull with it. Tableau card as well as Tableau as well if you follow what I'm getting at sorry for the multipart questions.

Leslie Trigg

No worries. Yes, I will endeavor to answer all of those and let me know if I overlook any time section of your question. So let me I think the first part was our orders in hand, taking a quick step back when we decided to effectuate the ship hold. We had to pause all sales, all marketing, all contracting in any of the sort of back-office order-taking or support activities. And that's exactly what we did so all of that needs to be reestablish. What are to give you at the next level of resolution on that? What does that look like? Those are activities like generating new quotes and redoing existing sales agreements, in some cases, getting new POs generated. And of course, there's a time factor for that.
None of this is difficult by the way that's the good news, but it does take a bit of time. And I think another factor too is just customer budgeting. In some cases, we expect customers will have to we budget for it. They might have had the funds allocated and approved several quarters ago and need to go back into their internal organizations and get those funds. And we have redeployed and approved and again, that's not difficult either, but it will take a little bit of time. I'm fine. I'm very confident we will have all the steps of well well underway. I do expect that to take us through the remainder of Q2. But again, the good news is, hey, we're ready for the back half right than we had originally expected. Tableau Cardiocom approval right around the midpoint of the year. And I think that the main benefit here of the early approval is it just gives us time to get prepared earlier than we expected get all the pieces ready in this ramp-up period and be prepared to really take advantage of this from a sales perspective in the second half, which is a lot of what's feeding our confidence in the second half growth trajectory and the sector is going to be a bit of a monologue, but it was a long question.
My defense, the second part you asked about was manufacturing and or a ship?
That answer is definitively, yes, because we already had Tableau cards in inventory at the time of the ship hold. So I don't expect any delays related to supply chain for manufacturing? And then I think the last section of your question was, hey, is the where is sort of the growth then is there a little bit of upside in the second half, perhaps if so, where is that? Where could that come from?
And Rick, you nailed it there. It's both. So we do expect that Tableau Tableau card will be kind of finally putting wind in the sales of Tableau. Again, Tablo consoles where those Tablo consoles were repeatedly deferred out of Q2 out of Q3 into Q4 out of Q1. Again, we absolutely believe that the Tableau carbo put the win back in those sales. And also, yes, we do expect orders for standalone card purchases into our existing customer base and our existing installed base where customers already have been using Tableau or maybe they have the Tableau card with the storage store and they want to upgrade that storage or to the pre filtration version. So we do expect revenue being generated through both of those channels, if you will.

Rick Wise

Yes. No, I appreciate all that a lot to unpack. And just a follow-up, I think would be helpful to hear a little more about the lighter than expected first quarter. I mean, just based on your commentary in the surrounding comments. I mean in a sense, it's it sounds like it was actually a better period than maybe the optics. The initial optics might suggest you help us better understand. And when you mentioned, I think you said Tableau had a delayed or delayed orders and the SAP cyber attack impacts, yes, now resolved, but how do I think would so with first quarter sales had been a million higher, 5 million higher. I mean, can you help us to understand the pieces and like whether that delayed order will come back in the second quarter et cetera?

Jim Mazzola

Yes. Hey, Rick, it's to bill. The first quarter really played out largely as we had guided. We had expected as saw first quarter and then recovery in Q2. And really ramping in the back half of the year. That's kind of the guidance commentary we gave entering entering this year and back in Q1. So we'd always said the first half of this year will look more like the back half of last year because again, in both periods, we didn't have cars. Having said so Q1 performed largely as we expected, having said that in Q1 specifically, we did see the continued deferral of console sales and card sales, which now is behind us with the card approval. And we did also experience a little bit from this change healthcare slowdown, which again, we believe is also behind us. So record Q1 really played out largely as we expected a little bit softer. But again, we believe we haven't lost any deals. And we believe again, that we're now going around Q2 for a strong second half of the year. Again, as we had originally guided.
Let me just add one more thing, just to reiterate on two things that I think are important to mention. One is the treatment revenue and the treatment orders in April have have really come back in the newer, they were very strong. And we're very again, we're very bullish about the direction for Q2 and the remainder of the year there.
And then you had embedded in your question, Rick asked something about Have any of these orders come come through on the console side? And the answer to that is yes. Actually one of the when the orders. It was deferred right out of queue toward the end of Q1 because of the change, healthcare situation actually was an order that was placed in April for the record there for sure.

Rick Wise

Thank you, Jeff.

Operator

Shagun Singh, RBC Capital Markets.

Shagun Singh

Great. Thank you so much. A quick follow up here. I was just wondering if there's a way to quantify the backlog of what was outstanding this waiting for Tableau card to get approval on restructuring. Is there any way you can provide the cadence for that 20 million savings in 24? And just what are you seeing on the profitability time line. I know you said a few quarters ahead, but anything more specific? And then I guess a big picture question for you, Leslie, can you just spend some time elaborating on your commercial organization by just trying to understand if you have the leadership in place of, you know, the feet on the street, if you will. How are you really looking to reengage these customers. Thank you for taking the questions.

Jim Mazzola

Sure. Maybe, Bill, you want to start off and I'll take over in a minute for sure, but maybe let me let me sort of lay out how we are thinking about the second half of the year, the full year really from a guidance perspective, right? And so let me go back to sort of, you know, we expect the first half of this year. So look largely like the back half of last year, again, because we haven't had card in any of those periods. So our guidance for Q2 is for revenue in the low 30 million zone. As Leslie pointed out, we've ramped back on cards that people face now again, as we think of the second half of the year. There's really two components that we need to. So first of all, we will have the recurring revenues on our larger installed base is the consumables and the service revenues, which will be roughly half of kind of any of our implied 2H revenue, if you will, if you take that and then sort of the remainder the remaining console revenue after you sort of take the second half and roughly half is recurring through remaining console revenue is roughly in line with what we did in the first half of 2023 when we had cars to be able to sell. So that's how we kind of thought about the back half of the year.
Moving on Shaygan, your second question, with respect to the savings, a little over half, the savings were from R&D and ops groups kind of VR. and D. more broadly speaking. And again, Leslie talked about the projects that were sort of again deferring or that we took a second look at the rest. So half is R&D and ops. The other half is just across the P&L. And again, it's things like spans of control, layers of management programs and projects that didn't have payback within our LRP horizon. So that's number two.
Number three from a profitability timeline perspective, let me first maybe talk a little bit more about the savings we've generated. So in total, we are saving through the actions we have undertaken over $100 million over our LRP period, roughly 20 million comes out of 24, as we talked about that annualizes to about $30 million in 25 and a little bit more than $30 million in 26 and 27. So a few propel that math through the model. You know, our initial expectation was that we'd get to breakeven exiting 27, you can see how again, if you take Canada 30 million a little bit over 30 million out of the out years, you can see how that will pull profitability forward by a few quarters.

Leslie Trigg

Maybe I'll pick up on the commercial org, I think was your last question and do we have adequate coverage out there to rapidly educate customers level for another. And the short answer is yes. We we are covered actually in all 50 states. And just as a quick reminder, we have a capital sales team. We have a clinical sales team and we have a national account team, all three of those teams I cover both acute and subacute, of course, and also home. And so we continue to get a lot of operating leverage out of this team. And I think we talked about that in past calls that that continues to be true. But we do have sales coverage in all 50 states and I am not worried at all about the speed with which our sales team will be sharing the news with both current customers and our potential new customers.

Operator

Ray Talbot, BTIG.

Ray Talbot

Hi, good evening. Thanks for taking the questions. I'm going to start here with a pretty high level. One on I know that one headwind you've talked about in the past is on a longer selling cycle and the CapEx environment being a little bit tougher. I wanted to hear how that's changed since you last spoke with us publicly. Has that gotten worse? Has it gotten better? Has it stayed the same on any detailed commentary you can give on that would be helpful.

Leslie Trigg

Yes, sure. I would ask, Dan, on the capital spending environment, it's been really stable, which has been, which has been a good thing. So we have not seen any material changes in the capital spending environment. We are also advantaged because Tableau and in-sourcing does have a very rapid payback period, typically inside of a year for a hospital that makes the conversion. And that certainly helps ensure that Tablo rises to the top of those capital budgeting prioritization list. But setting that aside in general, we saw a lot of stability in the capital spending environment. No changes to speak of.

Ray Talbot

Okay. That's great to hear. And then my follow-up here on gross margins, you just continue to exceed expectations there. Nice to see another increase on maintaining the guidance there. I mean, you are already starting the year in the low 30s, and we're expecting to have low 30s for the full year exit midyear mid 30s to exit the year.
And should we just expect smaller incremental improvements? Was this kind of a onetime leap and we should expect a little tick down. How should we think about the cadence for the rest of the year?

Leslie Trigg

Yes. Hemerus to bill, we are so we are really pleased with our team's ability to deliver our 12th consecutive quarter of gross margin expansion. And look, we think it is going to be linear from here to that mid 30% exiting the year on our way to 50%. So yes, really good performance.
And again, we just expect to continue down the path ahead and encouraging to hear good luck with that. Thank you.

Ray Talbot

Thank you.

Operator

Kristen Stewart, CL King.

Kristen Stewart

Thank you for taking the question. I was wondering if you could just expand a little bit more on the US Renal Care announcement and just in terms of when we could start to see an impact from that and really materializing.

Leslie Trigg

Yes, sure. Hi, Welles. U.s. Renal Care has been a good partner to us, have continued to be a good partner to us and our initial home programs with them were very successful. As I mentioned, it's one of the largest of these mid-sized dialysis organizations. They manage roughly 36,000 patients across the United States yet and increasing their home population and growing home is is really central to their mission.
Looking forward, I think what I'm what they were able to confirm for themselves is a much faster training time with Tableau, which made it easier to convince patients to adopt home on our training time. Our average duration despite a much wider and wider and wider demographic of patients adopting home is still remains remarkably consistent. It under 10 sessions, roughly two weeks that were equivalent to PD. So that's been a real selling point and that I think has been recognized by many provider organization. And really this retention rate has been key, and it is as it is so much higher than other alternatives out there. And that's really the point the point isn't to train as many people who can go, how the point is to keep as many patients as you can at home and that's really where the economics Bloom and of course, the clinical outcomes manifest themselves. And so we view U.S. renal care like all of our other partnerships within this NDO. segment as really critical to our own home growth. And we're privileged to be able to and to be a strategic weapon in their hands as well as they trying to grow home.

Kristen Stewart

Perfect. Thanks for taking the questions, of course.

Operator

Suraj Kalia, Oppenheimer.

Suraj Kalia

Good afternoon. And lastly, Jim, Nabeel, can you hear me?

Leslie Trigg

Alright Yes.

Suraj Kalia

Perfect seat. Leslie, a lot of commentary provided, if you could quickly that 90 day, 90% retention rate, if I were to extrapolate those curves at the one year time point, do you have visibility into what the retention rates are? And also specifically on workforce reduction, Leslie, was there any reduction in the sales and marketing division? Thank you.

Leslie Trigg

Sure. Yes. So let me speak to that. I'll talk about the patient retention rate, and I'll go to your second question. The yes, we do have data on the one year. And we it is also markedly markedly higher comp at one year on Tablo compared to the legacy home hemo system. And so we've been really pleased at the one year retention as well.
And then actually I'll make another remark. It has been very, very stable. So not only has it been much, much higher. It's been really stable. And Suraj, we've offered in the past that at one year, our what we call our controllable attrition, there's the uncontrollable attrition, which is out of our hands. Unfortunately, that staff in transplant. And then there's what we call the controllable attrition, which is that patients just opting how they want to go back and center, let's say, or something in their life changes, we should be able to affect that. We challenge ourselves to affect that. And so we really focus on doing a great job as an organization in the controllable attrition rate. And for us that controllable attrition rate at 12 months has remained very stable at about 10%. And despite our pretty significant growth in the denominator of patients, home on Tablo. So those results and Suraj said differently are holding between 90 days in a year. And regarding the and the reduction of our team, we the lion's share of the people as well as programs end and CapEx and other forms of OpEx were in, as Neil said, the operations and the R & D area with the remainder of those reductions spread across the organization. When we thought about the approach here and the philosophy around reducing our spend, we really had to non-negotiable. They're sort of sacred cows in mind. Our core tenants were number one, we have to preserve the patient and the customer experience. That is what is driving Caballos adoption growth into. We have to ensure that we continue to deliver on our gross margin expansion initiatives, which continue to pay off. So we're very, very, very carefully planned our cost reduction to avoid affecting those areas.

Suraj Kalia

Thank you.

Operator

Stephanie Lomibao, Bank of America.

Stephanie Lomibao

Hi. Thanks for taking the question. I appreciate the color on the guidance you've given and how we should think about the first half versus the second half of the year. But just wanted to follow up a little bit, I guess, is Q1 coming in a little late and not changing the outlook for the second half. Is there anything getting better maybe in the second half to offset and Q. one versus previous expectations and maybe any difference in how we should think about the low versus the high end of the guide now?

Leslie Trigg

Yes. Hey, Stephanie, from that. So with respect to Q1, again, it came in largely as we guided a little softer Q2, we'd always expected to be a ramping quarter for lack of a better word, again for all the reasons that Leslie talked about in terms of getting customers reactivated with Tableau cart with pre-fill efficient. So we do expect Q2 to step up a little bit in that low 30 million zone. As we said now when we think about the back half a couple of things. One, we will have Tableau cart with pre filtration for the full half because we expect to be ramped and are working to be ramped in the second quarter so that we're fully sort of ready in the second half.
And then let me talk a little bit about the second half and some more specificity. And really, Stephanie, it's two components. So one, we do have our recurring revenues, consumables and service of a larger installed base. As you know, as we enter the second half. And if you assume kind of even the low end of guidance that we have half of our 2H implied revenues come from recurring revenues, the other 50% coming from consoles is the same roughly the same amount of console revenues as we did in 1H 23, which was the last, you know, half year when we had Tableau carpet pre-fill attrition. That makes sense.

Jim Mazzola

Yes. Thank you, Stephanie, and interested of.

Stephanie Lomibao

Okay. So that's part one. And then as you think about moving to the guidance range, we've always had the same performance levers, right? So we can place more consoles in both our large home or acute end markets. We have ASP. We have at Tableau Pro plus penetration or sales. And of course, we have Tableau card sales both to our existing install base and to new customers. So those are kind of how we think about guidance in the back.

Leslie Trigg

I can add just a few points that came to mind when you're talking. I think in addition to TurboCAR, which is the big again, the big propellant I'm heading into the second half. But I will also reiterate, we did see very significant pipeline expansion in Q1, and we have talked before about our sales cycle being in the nine to 12 months of some deals and then come earlier than nine months and other deals go a bit longer than 12 months. But generally speaking, it's nine, 12 months. So with this significant pipeline expansion. I think I mentioned I want to reiterate at a higher percentage than ever of our deals in the pipeline are over $1 million in size each end and over half are from potential new customers. And so this pipeline is looking a little different to us in a very, very good way. And so that's another kind of tailwind for Q2, actually the second half. And then, of course, the third tailwind, which is related is that lapping of the sales cycle from Q3, Q4 of 2023 coming online in that second half of 24. So that's how I think about this three tailwinds and of propelling us to this growth trajectory through the back half of this year.

Jim Mazzola

Okay. Thanks. Stephanie.

Leslie Trigg

Next question, operator?

Operator

Joshua Jennings, TD Cowen.

Joshua Jennings

Thanks for taking the question. I was hoping to just start get an update on the Tableau enhancements that have been brought forward over the past 12 to 18 months. And it sounds like the CTO departed as part of the restructuring, Emageon, there's a deep bench there. But any any plans to replace is that head of that group? And then anything we should be looking for in terms of technology enhancements on the Tableau system as we move through this year?

Leslie Trigg

Yes. Sure, Josh. Happy to answer that. One of our, if not our CTO's, greatest guest and legacy to outset is the team that he put in place here. And he's leaving us with we have an absolutely stellar Vice President of software on very, very deep bench strength on on cyber and data analytics and EMR operability. And as we noted in the script, we have spent the last any number of years making very significant enhancements and investments in in all dimensions of software data data, transmission, cyber and EMR interoperability and now is our moment to harvest those investments and end up in it is that kind of really maximize the Tableau that we have today, we do have an advantage in this market, which is we are light years ahead. We have a very, very meaningful technology advantage, both hardware and software. And I know that has been pointed out to us by investors and shareholders that, hey, you guys have an incredible, incredible lead. And should you just be maybe taking a pause and really selling and marketing what you have. And I think that there's a lot of merit to that and we reflected on that a lot. We will never stop being sort of be imaginative, ambitious people that we are I can't change the personality of the organization. However, we do have an advantage in the lead that we already have both software and hardware. It will be our focus for that over the course of this LRP period to make the best use of that. But no, we are not going to stop dreaming. And as I mentioned, we are just going to probably more pace investments in the future that are aligned to the time line at which they might pay off, which is probably maybe toward the end of the LRP period for beyond. Hopefully that's helped that's going on.

Joshua Jennings

But just thinking about the evolution of the Tableau system and as you think about the LRP and what are the pricing assumptions, both on capital and on some of the disposables.
And should we be thinking about price increases year over year or is stable pricing?
The name of the game within that outlook your guidance?
Thanks a lot.

Leslie Trigg

Yes, Josh. I mean, we've so look, we've always talked about Tableau about our ability to protect our pricing on the low end. And then offering these value added accessories, including Tableau Pro Plus and now add back with Tableau cart with pre filtration. So again, that's how we think about and that's how we think about pricing broadly now and over the other periods.

Joshua Jennings

Okay.

Jim Mazzola

Thanks, Josh.

Leslie Trigg

On Operator, any further questions for us?

Operator

And there are no more questions in the queue. I'd like to go ahead and turn the call back over to Leslie for closing.

Leslie Trigg

Great. Well, I would like to thank everybody again for joining us this afternoon and wish everybody a very good evening. Thank you.

Operator

This concludes today's conference call. Thank you for joining. You may all disconnect.