Executive Summary / Key Takeaways

• Transformative Technology Driving Insourcing: Outset Medical, Inc. (OM) is pioneering a significant shift in dialysis care with its Tablo Hemodialysis System, enabling hospitals and patients to insource dialysis, which offers compelling clinical, operational, and financial benefits over traditional outsourced models.
• Strong Recurring Revenue Foundation: The company's business model is increasingly supported by a growing installed base of Tablo consoles, driving consistent and predictable recurring revenue from consumables and services, with an expected annual run rate exceeding $100 million by the end of 2025.
• Gross Margin Expansion and Cost Discipline: Outset Medical has demonstrated consistent gross margin expansion, reaching 39.9% non-GAAP in Q3 2025, alongside aggressive operating expense reductions, significantly narrowing its operating losses and improving cash utilization.
• Near-Term Execution Challenges Amidst Long-Term Opportunity: While the company revised its 2025 revenue guidance due to timing shifts in large enterprise deals and a recent sales leadership change, the underlying demand for Tablo's technology and the pipeline of opportunities remain strong, signaling a temporary execution hurdle rather than a fundamental demand issue.
• Solidified Financial Position for Growth: A recent recapitalization, including substantial equity financing and debt reduction, has significantly strengthened Outset Medical's balance sheet, providing sufficient liquidity to reach cash flow breakeven and support future growth initiatives.

The Dialysis Paradigm Shift: Outset Medical's Insourcing Advantage

Outset Medical, Inc. is at the forefront of a significant transformation in dialysis care, challenging the long-standing paradigm of outsourced services with its innovative Tablo Hemodialysis System. Incorporated in 2003, Outset Medical set out to reduce the cost and complexity of dialysis, a mission that has become increasingly critical in today's healthcare landscape. The company's core strategy revolves around empowering healthcare providers and patients to "insource" dialysis, moving treatment from traditional, often expensive, third-party services to in-house management within hospitals, post-acute facilities, and even patients' homes. This strategic pivot is gaining traction as providers seek greater control over costs, clinical outcomes, and operational efficiencies.

The hemodialysis market is dominated by established players such as Fresenius Medical Care AG & Co. KGaA (FMS), Baxter International Inc. (BAX), and DaVita Inc. (DVA). These competitors offer a range of dialysis products and services, often leveraging extensive global networks and clinic-based service models. Fresenius, for instance, is a global leader with a broad portfolio and robust cash flow, benefiting from its scale and distribution. Baxter, with its integrated healthcare solutions, emphasizes reliability and broad accessibility, supported by consistent R&D. DaVita, primarily a service provider, boasts an extensive clinic network and expertise in patient management.

Outset Medical, however, differentiates itself as a niche innovator. Its Tablo system stands out by emphasizing portability, integrated water purification, and user-friendly software, which offers a qualitative edge in convenience and accessibility for patients and providers. While larger competitors like FMS and BAX benefit from greater scale and product diversity, Tablo's all-in-one console design and focus on decentralized care position Outset Medical uniquely in emerging home dialysis markets. The company's strategic focus on empowering patients via portable systems contrasts with DVA's reliance on physical facilities, allowing Outset Medical to potentially outpace some competitors in the shift towards home-based care.

Technological Edge: The Tablo System's Differentiators

At the heart of Outset Medical's investment thesis is the Tablo Hemodialysis System, a technological marvel cleared by the U.S. Food and Drug Administration (FDA) for use across the continuum of care, from hospitals to homes. This system represents a significant advancement designed to transform the dialysis experience. The Tablo console integrates water purification and on-demand dialysate production into a single, compact 35-inch unit, effectively serving as a "dialysis clinic on wheels." This integration eliminates the need for burdensome infrastructure typically associated with traditional dialysis machines, simplifying operations for providers and enhancing flexibility for patients.

The system features a simple-to-use touchscreen interface, two-way wireless data transmission, and a proprietary data analytics platform. This connectivity allows for continuous streaming of over 500,000 device performance data points to the cloud for every treatment. This data, combined with diagnostic and predictive algorithms, enables remote monitoring, identification and diagnosis of failures, and even prediction and prevention of potential future malfunctions, contributing to reduced service hours and increased device uptime. The wireless capabilities also facilitate over-the-air delivery of training, new features, and enhancements without requiring field service engineer interventions.

These technological differentiators translate into tangible benefits for investors. The simplified operation and reduced infrastructure requirements contribute to lower operational costs for healthcare providers, which in turn supports Tablo's strong Average Selling Prices (ASPs). The system's ease of use and portability are critical for driving adoption in the home setting, a market segment with significant growth potential. The robust data ecosystem not only enhances device performance and reliability but also provides valuable clinical and operational insights to customers, strengthening Outset Medical's competitive moat. This technological advantage allows Outset Medical to compete effectively against larger rivals by offering a superior, patient-centric solution that streamlines care delivery and improves outcomes.

Strategic Evolution and Commercial Momentum

Outset Medical's journey has been marked by a deliberate strategic evolution, particularly in its commercial approach. Initially focused on driving adoption in the acute care setting, the company has successfully expanded Tablo's footprint, with the system now in use at more than 900 acute and subacute sites across the United States. This expansion is fueled by the compelling clinical, operational, and financial benefits that insourcing dialysis with Tablo delivers. For example, AdventHealth reported a 94% reduction in serious cardiac or respiratory events and a 75% reduction in central line bloodstream infections after converting to an insourced dialysis service line with Tablo.

The company has undertaken a comprehensive sales transformation, restructuring, retraining, and enhancing its commercial organization to infuse an enterprise sales skill set. This includes implementing a new capital sales process with high specificity, accountability, and discipline, alongside rigorous sales management inspection and tools to improve forecasting and deal closure timing. These efforts have yielded positive results, with the pipeline growing meaningfully and the average size of sales opportunities increasing by more than 20% in Q3 2025. The company is now adept at educating stakeholders at all levels of an enterprise, from CNOs to executive leadership, about Tablo's value proposition. The appointment of Brittni McGill as the first Chief Nursing Officer in July 2025 further underscores this focus, as she will leverage her experience to guide customers through the transition from outsourced to insourced dialysis.

In the home end market, Outset Medical has made significant strides, maintaining high patient retention rates (above 90% at 90 days) and securing agreements with all five of the largest midsized dialysis organizations (MDOs) in the United States. This provides access to Tablo for approximately 15,000 dialysis patients across 30 states. While home market adoption is expected to evolve more gradually than the acute market, these partnerships lay a strong foundation for future growth. The company also continues to explore opportunities in skilled nursing facilities (SNFs), viewing it as a future growth vector that leverages the same core value proposition as acute care.

Financial Performance: A Turnaround in Progress

Outset Medical's recent financial performance reflects a company in a significant turnaround, demonstrating consistent progress towards profitability despite its history of net losses and negative cash flows from operations. For the nine months ended September 30, 2025, total revenue increased by 8% to $90.6 million, compared to $84.2 million in the prior year. This growth was primarily driven by product revenue, which rose 8% to $64.9 million, with consumable revenue increasing by $4.7 million and console revenue by $0.3 million. Service and other revenue also saw a 6% increase to $25.7 million, largely due to the expanding console installed base.

Gross profit has shown a notable upward trend, increasing for both the three and nine months ended September 30, 2025. Gross margin improved by 5.1 percentage points for both periods, reaching 39.4% in Q3 2025, up from 34.3% in Q3 2024. This expansion was primarily driven by higher average selling prices for consumables and consoles, lower unit costs per console, and improved gross margin on service and other revenue. Non-GAAP gross margin reached 39.9% in Q3 2025, and would have been above 41% excluding a 138 basis point headwind from manufacturing overhead under-absorption. Product gross margin increased 250 basis points year-over-year to 45.7% in Q3 2025, while service and other gross margin more than doubled to 24.8% from 12.5% in Q3 2024.

Aggressive operating expense management has been a cornerstone of the company's path to profitability. Non-GAAP operating expenses declined 17% to $22.1 million in Q3 2025, compared to $26.5 million in Q3 2024, reflecting the positive impact of actions taken to remove approximately $80 million of annualized spend. This discipline led to a non-GAAP operating loss of $10.4 million in Q3 2025, over 35% below the prior year's operating loss. The net loss for Q3 2025 was $17.8 million, a 39% reduction from $27.9 million in Q3 2024.

Liquidity and Capital Allocation

Outset Medical has significantly strengthened its financial position, providing a robust foundation for its growth initiatives. As of September 30, 2025, the company held $182 million in cash, cash equivalents, restricted cash, and short-term investments. This follows a strategic recapitalization in January and March 2025, which included a private placement of Series A Convertible Preferred Stock, generating total gross proceeds of $172.7 million. Concurrently, the company refinanced its debt, reducing outstanding term loans from $200 million to $100 million with a new 5-year term loan from Perceptive Credit Holdings IV, LP, pushing the maturity out to 2030. This debt reduction and new financing provided approximately $210 million in cash at the start of 2025.

The company's focus on operational efficiency and expense management has translated into a significant reduction in cash burn. Outset Medical used approximately $6 million in cash during Q3 2025, driven by expanding gross margins, lower operating expenses, and inventory optimization. Management projects to use less than $50 million of cash in 2025, representing a more than 50% reduction from the over $100 million used in 2024. This improved cash utilization, combined with the recent capital raise, leads management to believe that existing cash balances are sufficient to meet anticipated needs for at least the next 12 months from the 10-Q filing date (November 10, 2025) and through cash flow breakeven and beyond. The Perceptive Credit Agreement includes customary covenants, such as maintaining a minimum cash balance of $10 million and achieving certain trailing twelve-month net revenue targets, which the company must adhere to.

Outlook and Key Assumptions

Outset Medical has revised its 2025 revenue guidance to a range of $115 million to $120 million, down from the prior guidance of $122 million to $126 million. This adjustment primarily stems from a timing shift in several large console opportunities that were forecasted to close in Q3 and Q4 2025, now expected to materialize over Q4 2025 and into 2026. This is characterized as a delay in closing significant insourcing opportunities with large national health systems, rather than a loss of these deals. The complexity of enterprise-wide insourcing deals, often requiring approvals from executive leadership across numerous hospitals, has extended sales cycles.

An additional factor influencing the revised guidance is the recent resignation of the head of sales in early November 2025. While a search for a new leader is underway and a strong sales leadership team remains in place, management prudently accounted for potential internal disruption in Q4. Despite these near-term challenges, the underlying demand for Tablo in the acute care market continues to grow, and the company's pipeline has expanded meaningfully, with the average size of sales opportunities increasing by over 20%.

For the full year 2025, Outset Medical continues to expect gross margin to be in the high 30% range. Operating expenses are projected to remain in the low $90 million range, reflecting ongoing cost discipline. The combination of anticipated revenue growth, gross margin expansion, and expense management is expected to result in cash usage of less than $50 million in 2025, a significant reduction from the prior year. Management views the revised 2025 guidance as a "good starting point" for considering 2026, maintaining a conservative approach while focusing on execution.

Risks and Challenges

Despite Outset Medical's promising trajectory, several risks and challenges warrant investor attention. The primary near-term concern is the predictability of deal timing, particularly for large enterprise-wide insourcing opportunities. The complexity of securing approvals across multiple hospitals within large health systems has led to elongated sales cycles and shifts in expected closure dates, as evidenced by the Q3 2025 revenue guidance revision. This could continue to introduce volatility into quarterly revenue recognition.

The recent resignation of the head of sales may also lead to internal disruption in the commercial organization, potentially impacting selling hours and overall sales productivity in the near term. While management is actively addressing this, a leadership transition always carries inherent risks. Furthermore, ordering patterns for consumables from large acute care customers have not always perfectly mirrored underlying utilization, leading to dampened recurring revenue in Q3 2025. The company plans to improve forecasting and alignment in 2026, but this highlights a potential disconnect in supply chain management with key customers.

Macroeconomic factors, including inflationary pressures, rising interest rates, and staffing shortages, continue to pose risks. These conditions can lead to more cautious capital spending decisions by hospitals, potentially delaying Tablo purchases. The company's manufacturing operations in Tijuana, Mexico, expose it to foreign operations risks, including potential labor disputes, public health crises, and changes in foreign laws and regulations. Specifically, proposals to reduce Mexico's workweek hours could increase labor costs and impact productivity.

Moreover, the U.S. Department of Commerce initiated an investigation in September 2025 into the national security implications of imported medical equipment, including medical devices. While Tablo products currently have a special tariff exemption, the outcome of this investigation is uncertain and could result in additional tariffs or affect existing exemptions, potentially impacting supply chain costs and gross margins. Lastly, the company is involved in stockholder class action and derivative lawsuits alleging materially false or misleading statements. While these cases are in early stages, they represent a potential financial and reputational risk.

Conclusion

Outset Medical, Inc. stands at a pivotal juncture, poised to capitalize on a significant market opportunity by transforming dialysis care through its innovative Tablo Hemodialysis System. The company's core investment thesis is firmly rooted in its differentiated technology, which enables cost-effective and clinically superior insourced dialysis across acute, post-acute, and home settings. Despite recent challenges related to sales execution and deal timing, the underlying demand for Tablo's unique value proposition remains robust, evidenced by a growing pipeline and increasing average deal sizes.

The consistent expansion of gross margins, coupled with aggressive operating expense reductions, demonstrates a clear and accelerating path towards profitability. The recent recapitalization has fortified the balance sheet, providing the necessary capital to navigate near-term hurdles and fund future growth. While the company faces risks from macroeconomic pressures, competitive dynamics, and operational complexities in its manufacturing, its technological leadership and strategic focus on enterprise selling and home care expansion position it favorably for long-term value creation. Investors should monitor the company's ability to refine its sales forecasting, integrate new commercial leadership, and continue its trajectory of gross margin improvement and cash flow optimization as it strives to fulfill its mission and achieve sustainable profitability.