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NxStage Medical, Inc. (NASDAQ:NXTM)

Q1 2014 Results Earnings Conference Call

May 08, 2014, 09:00 AM ET

Executives

Kristen Sheppard - VP of IR

Jeff Burbank - CEO

Matt Towse - CFO

Analysts

Kevin Ellich - Piper Jaffray

Danielle Antalffy - Leerink Swann Partners

Bill J. Plovanic - Canaccord Genuity, Inc.

Chris Cooley - Stephens

Gary Lieberman - Wells Fargo

Margaret Kaczor - William Blair

Operator

Good day, ladies and gentlemen, and welcome to the NxStage Medical's First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to disperse this conference call to Ms. Kristen Sheppard. You may begin ma'am.

Kristen Sheppard

Thank you, good morning. Welcome to NxStage Medical's first quarter 2014 financial results conference call. My name is Kristen Sheppard and with me here today is Jeff Burbank, NxStage's Chief Executive Officer; and Matt Towse, our Chief Financial Officer.

For your convenience, a replay of this call will be available shortly after its conclusion. In addition, the press release for the first quarter and a recording of this call will be archived on our website under the Investor Relations section.

Before starting, I would like to remind you that statements we may make on this call which are not purely historical regarding the company's or our intentions, beliefs, expectations and strategies for the future are forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may include topics such as the results of our operations, growth of the Home and more frequent hemodialysis market in general, market adoption and demand for our products, both domestically and internationally, our expectations regarding relationships with key customers, continued supplies from key vendors, our plans with respect to regulatory filings, our plans with respect to future developments including NxStage Kidney Care, beliefs as to the expected impact of current economic, reimbursement or regulatory conditions on our business, anticipated improvements in the operating efficiencies, gross margins, and product quality and financial guidance for the future.

Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our SEC filings, including our most recent annual or quarterly report.

In addition, any forward-looking statements made on this call represent the company's views only as of today and should not be relied upon as representing our views as of subsequent dates. Future events and developments may cause these expectations to change, and while we may elect to update forward-looking statements at some point in the future, the company disclaims any obligation to do so, and therefore you should not rely on these forward-looking statements as representing our views on any date subsequent to today.

Now, I'd like to hand the call over to our CEO, Jeff Burbank.

Jeffrey H. Burbank

Good morning, and thanks for joining us. We obviously feel very good about our results for the first quarter. Total revenue of $72.2 million exceeded our guidance and grew 17% over the prior year. We delivered solid growth in the Home and had particularly strong growth in Critical Care well ahead of our expectations.

The bid on revenues combined with a favorable product mix delivered higher margins and better net loss than expected for the first quarter. Matt will go into more details on our financial results in a moment.

Consistent execution against out strategic growth initiatives, many of which we laid out for you over a year ago, is less driving our results. We believe our home performance is a nice validation of our strategy and execution. We continue to believe our technology leadership and the significant markets we serve will drive long term improvement in our financial performance and shareholder value creation.

Within the U.S. both patients and customers continue to respond well to our near term growth initiatives, which include direct to patient marketing. Together with our partners we are continuing to grow training rates as a result of these activities and seek opportunities to grow across additional geographies this year.

At the same time, we're making progress in international consistent with our expectations. We're expecting to build on this momentum throughout 2014 with our new products. As planned, we'll be leveraging our significant investment and innovation with full commercial launches of the System One S and our Nx2me Connected Health platform.

Based on initial customer and patient's successes, I believe we're off to a great start. Well, transitions of full market releases of these products during Q2. These smooth and timely launches are another testament to the quality and capability of the technology we develop.

We're also excited to be leading the market by introducing nocturnal home hemodialysis and single-needle within CE Mark countries this quarter.

I believe we'll be very busy at the upcoming European Dialysis and Transplant Association meeting as customers again see the technology leadership we provide. All of these innovations represent growth opportunities with significant advancement for patients, care partners, doctors and providers.

With these innovations in hand and our strong pipeline, we continue to ease of use and reduce the burden of therapy, by providing such a beneficial therapy option.

We're fully enrolled in our U.S nocturnal trial and expect our last patient to complete the study in the next few days. Based on that, we'll be in a position to submit our nocturnal home indications to the FDA. We should be able to check this significant milestone off on our Q2 call.

Turning to our mid to long term growth initiatives, our development activities with respect to NxStage Kidney Care are attracting are on plan. We currently have four centers open, St. Louis, Chicago, Jacksonville and Orlando Florida. We remain on track for our goal of 10 to 15 open by the end of 2014.

With respect to products, I've never been more excited about the technological capabilities and the level of innovation in our pipeline. This includes our next generation technology as well as our PD system.

We continue to lead, not only in our ability to innovate but also execute all the way to the market. I expect our pipeline will not only enhance the patient and provider experience, but provide us additional growth opportunities. It's great to see the progress the development teams are making.

So, in wrapping up, it's been a strong start to the year. Our plan is on track and we believe we're well positioned to execute for the rest of the year. We remain confident in both our 15% growth target per home as well as our overall outlook. Matt?

Matthew W. Towse

Thank you Jeff, and good morning. I'll review revenue for the first quarter, including details of our reportable segments, discuss the company's financial performance and then I'll finish with some comments regarding our outlook for the second quarter.

As Jeff mentioned, we had a solid start to the year and exceeded our guidance on both top line and bottom line results. Our System One performance in both Home and Critical Care was key in driving the quarter.

Total revenue came in well ahead of our guidance, at $72.2 million. This represents the 17% increase over the first quarter of 2013.

Home revenue increased 16% over Q1 of last year to $36.5 million, reflecting solid performance in both U.S and international markets and inline with our overall expectations. And we continue to make good progress with our strategic growth activities toward our 15% annual growth target in 2014.

In Critical Care, we started out the year very strong, with revenue increasing 37% to $14.7 million in the first quarter of 2014. This performance was much stronger than we anticipated, reflecting both high equipment and disposable sales.

Although we're very pleased with the team's performance here, we believe it's too early to characterize and strengthen this growth particularly given uncertainty around macro trends such as hospital CapEx spending, admissions and utilization.

Having said that, we do remain comfortable with our previous outlook for Critical Care for the year.

And for our In-Center business, first quarter revenue was slightly higher than a year ago at $18.9 million. I remind you the quarterly In-Center revenue will continue to be susceptible to fluctuations as a result of inventory management policy with both our distributors and end-users.

I'd also like to point out that consistent with our plans, we announced separately reporting, our market development initiatives with NxStage Kidney Care under a new reportable segment labeled services.

As Jeff indicated, while it's still very early, we are pleased with the progress we're making here and as we've indicated earlier this year, we don't expect revenues to be material and have not included them in any of our revenue guidance.

And then finally in other revenue, we reported $2 million for the first quarter reflecting the company's dialyzer sales to Asahi.

Now turning to gross margins, System One gross margin increased to 49% in the first quarter. This was driven by the higher revenues and more favorable product mix, primarily as a result of Critical Care's out performance in the quarter.

While we are likely to lose some of the benefits from product mix in Q2, we continue to make progress on our product gross margin improvement initiatives, and continue to target System One margins above 50% in the long term.

For the total company, first quarter gross margin increased to 40%, up 300 basis points from the first quarter of 2013. This was driven by the same first quarter factors from System One that I just mentioned.

NxStage had a net loss of $5.3 million for the first quarter of 2014, compared with a net loss of $5 million for the first quarter of last year. Again, higher revenues and a more favorable product mix, also resulted in a better than expected net loss versus our guidance.

Note too, that our total net loss reflects roughly of $3 million loss, due to our investment in NxStage Kidney Care, which was in line with our expectations and was offset by improved performance in other parts of the business. As we make progress toward our goal of positive operating income in 2015, excluding our investment in NxStage Kidney Care.

Now turning to our guidance. After strong first quarter, we believe we are trending towards the higher end of our annual revenue guidance, which was originally said to be between $283 million and $288 million, and we remain focused on 15% growth in the Home in 2014.

And specifically for the second quarter, we expect revenue to be in a range of $70 million to $71.5 million, with a net loss in the range of $7.5 million to $6.5 million.

Also, as we mentioned in our last call, as a reminder, as you work through models, please keep in mind that Home revenues will remain choppy on a quarter-to-quarter basis as a result of international equipment sales.

So, to wrap up, we're pleased with the results for the first quarter. This gives us a strong start to what we expect will be an exciting year for NxStage as we continue to leverage our investments that will drive our growth objectives and enhance shareholder value.

With that, I'd like to open the call to questions. And operator, we're ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kevin Ellich with Piper Jaffray.

Kevin Ellich - Piper Jaffray

That's a nice quarter, let me first start off with the obvious, Home revenues up 16%, much better than expected, what's really driving that, I mean, Jeff can you give us the factors and then kind of, obviously then showed some confidence that you guys can hit the 15% for the year?

Jeffrey H. Burbank

Yeah, obviously we're very pleased with the first quarter performance, and I think, no difference in the story, we're seeing the impact of the Asian marketing programs, the new products are starting to kick in and have an effect High Flow, Nx2me Connected Health. High Flow is now broadly available and Nx2me Connected Health will be out, but also resulting calculated driving that, inclinations are starting to see the flexibility of the system.

So, we're seeing some patients come on, that probably wouldn't have saying come on, without those products. So we're seeing an effect there on products.

International had a good quarter, very stable, continues to grow nicely for us. So, it's contributing about where we wanted it to, and then obviously we have our stability and pricing and our two largest customers on multi-year contract, so all that worked out well for us as well.

So, all-in-all everything came in as we were hoping and so, we feel great against the goal of 15% this year.

Kevin Ellich - Piper Jaffray

Would you say international is growing double-digits as well?

Jeffrey H. Burbank

No, I think, what we indicated last quarter, as we expect of the 15% about 3% of that, to come from international, we were great inline with that.

Kevin Ellich - Piper Jaffray

Got it. Okay. That's helpful. And then, incentive revenues came in a little lower than we expected, I guess, what's going on there, and I guess, what should we expect for the full year?

Jeffrey H. Burbank

Yeah. So that's the easiest question of the day that was just timing. So, no story there, we got clear visibility in order of patterns and also it was timing, we see that chopping, if you go back and look across, that's where you'll see that. So, no new news there, everything is going fine.

Kevin Ellich - Piper Jaffray

Should that growth accelerate or do you think it's going to stay kind at this level?

Jeffrey H. Burbank

We were little bit conservative for the year, as we have some contracting to do in the second half of the year. First half is coming in how we expected it and will stay a little bit conservative on the second half. So, we basically set flat for the year on In-Center.

Kevin Ellich - Piper Jaffray

In-Center, okay. Got it. Two last quick ones for me, nocturnal, heard the comments about - maybe something on Q2 call, is that what, - do you actually expect approval by, before the next call or is that just a submission to the FDA.

Jeffrey H. Burbank

Submission to the FDA. We got our last patient reaching the end of the trial, actually in two days. So, we'll be at position to finish up all the analysis and submit that file 10-K. So, feel good about, contracting that box and we'll make sure we do that and give you an update on the next call.

Kevin Ellich - Piper Jaffray

Got it. And then last one is, the NxStage Kidney Care Centers, just wondering if you can give us some anecdotal comments or takeaways from the first, four centers opened. Thanks.

Jeffrey H. Burbank

We just feel really good about that focused initiative on track for the 10 to 15 for this year. Still, lot of great things for patients, actually I was there in one of our centers this week and checking on things, feel great about the patient experience we're providing.

Obviously, very early in that initiative, so, we've got a lot more work to do, a lot of learning to do, but, I think we're going to achieve our goals, which is to have a place that folks can see new products and action, where we can do some clinical work, so we can stimulate the market and things like that.

So, it all feels good but it's really early, we've got lot more to do, but as we saw, we have a couple more online, now than the last time we talked.

Kevin Ellich - Piper Jaffray

Got it. Thanks again.

Jeffrey H. Burbank

You're welcome.

Operator

Our next question comes from Danielle Antalffy with Leerink Swann Partners.

Danielle Antalffy - Leerink Swann Partners

Hi, good morning guys. Thanks so much for taking the question and congrats on the great quarter.

Just a follow up on the NxStage Kidney Care Centre, since it was, and is open now for about six months, I was wondering if you could give us some color on two things, number one, how you're seeing DaVita and Fresenius react in that region, i.e. are you getting referrals to your center from DaVita and Fresenius center?

And then number two, that area is one of the higher penetration, home hemo penetration areas in the country, I think it's probably double the national average. Have you seen the needle move at all on that front or is it just too early to tell?

Jeffrey H. Burbank

Well, the focus of the centers of excellence is to create access where we thought there was under utilization or the market needed additional capacity or access.

So, that's exactly how we've seen it, the patient's that have come into the centre, we believe are coming from areas of the market that didn't have access to it.

Fresenius and DaVita are obviously great customers. That makes no sense for us to do anything but try to make them bigger, better and help them anyway we can. So, we have not seen patients transitioning over, that's not the focus at all, it's to create an option for clinicians that don't have access to good home training program and that's how we're really seeing it play out. So far, - and obviously it's early, but so far, we're very consistent with our expectation in St. Louis and, it's little bit early but it seems to be the same in the other market as well.

Danielle Antalffy - Leerink Swann Partners

Okay. Great, that's helpful. And then competitive market dynamics, are you guys seeing anything as from your competitor launching home system?

Jeffrey H. Burbank

Nothing. No.

Danielle Antalffy - Leerink Swann Partners

Okay. Great. Thank so much guys.

Jeffrey H. Burbank

Yeah.

Operator

Our next question comes from Bill Plovanic with Canaccord.

Bill J. Plovanic - Canaccord Genuity, Inc.

Thanks. Good morning, can you hear me okay?

Jeffrey H. Burbank

Yes.

Bill J. Plovanic - Canaccord Genuity, Inc.

Great. Jeff, you gave some commentary on Critical Care in the quarter, but that was $3 million higher than any quarter, is more granularity would be helpful, is it a big customer for systems, with this people loading in on disposables, what exactly drove it? Because it is still outsized relative to any other quarter you reported.

Jeffrey H. Burbank

Thanks for noticing, it was a great execution there. I'll take a few of those things off the table, it wasn't a big single order, it was broad based. So, at this point, I think we're just going to have to call it, it was a really good quarter, really solid quarter. We want to watch it a little bit longer, we don't see any fundamental thing, that's out of the box, there is no change in the market that we can point to, there's no change in kind of utilization.

So it might have been a little bit of timing but we want to watch that. It just - sometimes the statistics line up and you get a really good quarter and I think we're going to put it in that box for now and we'll watch it going forward. That's the idea behind it.

Matthew W. Towse

The other thing too Bill is that, to your question, it was across the board, it wasn't equipment, it wasn't fluid, it wasn't disposable, so, we saw strike both.

Jeffrey H. Burbank

And it wasn't consolidated in any one customer or group of customers either.

Bill J. Plovanic - Canaccord Genuity, Inc.

And, is this, - did it delete your, let's say, your funnel to sell systems in the future, it's like, just cleared out kind of the leads.

Jeffrey H. Burbank

I don't think so, but, we're going to be a little conservative, it's early in the year, so, we're going to watch that, but it doesn't feel that way. No.

Bill J. Plovanic - Canaccord Genuity, Inc.

Thanks. And then, your distribution expenses were little higher than normal, they stepped up, anything specifically driving that?

Jeffrey H. Burbank

Well, part of it was, the increase in revenue and the good pharmacy and Critical Care for the quarter. We have some expertise deliveries in the quarter as well, that bought the costs up.

We brought that back down at the end of the quarter, so, we should be back inline for second quarter.

Bill J. Plovanic - Canaccord Genuity, Inc.

Okay. That's all I have. Thank you very much.

Jeffrey H. Burbank

Thanks Bill. Thank you.

Operator

Our next question comes from Chris Cooley with Stephens.

Chris Cooley - Stephens

Thank you, good morning. Can you hear me okay?

Jeffrey H. Burbank

Okay.

Chris Cooley - Stephens

Hey, could you just give us a little bit maybe more color on the direct to patient initiatives, in terms of the incremental roll out that may have occurred during the 1Q and then kind of how we think about that phasing through the balance of the year. Clearly that's helping to build some positive momentum, just want to make sure we're getting our expectations around not only the number but also the correlated spend for that initiative. And I've got just one quick follow-up. Thanks so much.

Jeffrey H. Burbank

Yeah. So, both are on track. Both the number, we've said, to do 150 this year, we're on track with that plan and the economics and the performance are on track with what we've - based our objectives on. So, we're executing nicely there.

Chris Cooley - Stephens

Okay, super. I'd like to just follow up on Bill's prior question too on Critical Care, I appreciate that it was just a (indiscernible) quarter across the board there. And let's take a bigger lap for that one.

But also want to make sure, we're kind of engaging expectations appropriately, should we assume, I know you don't give quarterly guidance, but, clearly not sustainable in the 2Q, so, I'm just trying to think about, maybe any additional color you can give us about how you see the remaining periods flowing forward?

Jeffrey H. Burbank

At this time, we're going to expect with our guidance there, so, we're not up seeing the annual guidance for Critical Care based on one quarter, we want experience, - grow our experience a little bit more.

Chris Cooley - Stephens

I'm sorry, just wanted a quickie, I know, you mentioned earlier that you're launching of course nocturnal and the single-needle, and you open this quarter. Could you just maybe talk a little bit how you see that playing forward in terms of not only maybe helping to drive further adoption, but also maybe still need to drop out rate when you see the European population. Thanks so much.

Jeffrey H. Burbank

So, a little bit, there's going to be theory on this one because we do a lot of analysis on causes for dropout and we do a lot of the market analysis to see what the needs and interests are.

And the nocturnal capability really lines up with both of those. We think, patients will prefer in some cases to use their sleeping time versus their waking time, because that's more efficient for them in terms of the dedication to the therapy and what that takes out of their life.

So we do think that, - we're going to see an expansion due to that. We also know there are some marketplace in U.K and Canada that have a lot of experience and maybe even a clinical bias towards nocturnal versus short daily.

So, we want to make sure our product is perfectly aligned to those customer expectations. So, with that said we think we have a lot of analysis behind the drivers and believe that that will be one of the impacts on continuing to accelerate our growth here.

Chris Cooley - Stephens

Super. Congrats on a great quarter.

Jeffrey H. Burbank

Thanks.

Operator

(Operator Instructions) Our next question comes from Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo

Would the $3 million expenses to the Kidney Care segment was only CapEx, in addition to that or did that include the CapEx as well?

Matthew W. Towse

Gary this is Matt, this is the operating loss, the CapEx was around $3 million.

Gary Lieberman - Wells Fargo

Okay, so additional $3 million for CapEx. Okay, and is there any statistics you can provide, number of, - either number of patients you have or number of patients you saw come into the clinics that were interested, anything like that?

Matthew W. Towse

Not yet Gary, got a get it few days open and more to a steady state. We know our peers got a benchmark on those things, but, we're just so volatile on these early days, but it's not meaningful.

With that said, I guess Gary, we've got an expectation of how that model works and the aggregated centers, I'm little ahead and a little behind but we're on track with that. So, we feel good about, so far, in these early days, they're tracking how we anticipate they would.

Gary Lieberman - Wells Fargo

And then, I guess, any challenges in terms of billing with payers, Medicare or the managed care guys or any other kind of challenges, in terms, of opening other ones?

Matthew W. Towse

No, from a revenue recognition standpoint, it takes a little bit of time and we only recognize and you'll see that's in our Q&A hits. We recognize revenue on accrual for customers that we have contracts with. And we do it on cash for once where we don't.

So, you'll see some choppiness in the revenue recognition, but, no issues with payers, no surprises there.

Jeffrey H. Burbank

That's why I had a crunches there, and accruals for Medicare as well.

Gary Lieberman - Wells Fargo

Okay great. Thanks very much.

Matthew W. Towse

Whole lot of time we get contracts with folks and we work through that, but we haven't had any issues around payment.

Gary Lieberman - Wells Fargo

Got it. Thank you.

Operator

Our next question comes from Kevin Ellich with Piper Jaffray.

Kevin Ellich - Piper Jaffray

How many centers, even though service revenues was only $115,000 this quarter. How many centers did that include? Were all four open for the whole quarter?

Jeffrey H. Burbank

That's a good question. Only one had revenue recognition.

Kevin Ellich - Piper Jaffray

And, so, we could basically (indiscernible) and that kind of the run rate…

Matthew W. Towse

No, no, they open at different times. And that one had deferred revenue from some of the cash, that's the kind we're doing.

Jeffrey H. Burbank

So, let's take clinic revenue off the table right now as a way to measure the progress in clinics, because, the way we're accounting for it is, I think, aligns with GAAP, but I don't think it reflects the activities that are going there.

There is a process of getting that to a steady state and we're in the early part of that process.

Matthew W. Towse

And its lot small numbers too, so, it's not hard to extrapolate on that.

Jeffrey H. Burbank

And, let me be clear about this, what Matt said, was the $100,000 doesn't even represent all of the revenue potential for both the centers that is up and billing.

There are additional centers that are open, but it takes time to get to a point where you have your certifications and billing. So, it takes a while to get a steady state revenue. So, I'd encourage you to not tie that revenue number to progress, overtime, it will, but, right now it doesn't.

Kevin Ellich - Piper Jaffray

Got it. So, basically there could be a period, what you're saying, there's a period, whether it's a couple of weeks or months, where you might, the centre is open, you might be providing services but not actually picking cash centers, picking revenues.

Jeffrey H. Burbank

I actually recognize in the revenue, look it that way, because - when you look at how you do this for GAAP, you're providing services with it and most of those you'll expect to get paid, but you're not recognizing it in the period. So, it'll take a while before that coincides. That's why we don't think revenue is a good metric at this point in Kidney Care.

Kevin Ellich - Piper Jaffray

Okay. Then, the other question…

Jeffrey H. Burbank

You said a couple of weeks, think, a couple quarters or couple of months, is more realistic expectation relative to timing it takes.

Kevin Ellich - Piper Jaffray

Okay, that's helpful. And then, just, kind of follow-up there. The inner segment eliminations, will that grow in tandem with the services revenues over the next, as more centers will open, inner segment eliminations will grow kind of it there proposition.

Jeffrey H. Burbank

There will be some mismatch because of what we just talked about in the timing of revenue recognition, but as the number of patients and the treatments grows as we're buying essentially more product, to treat those patients, that will grow with that number.

Kevin Ellich - Piper Jaffray

Okay. And then lastly, the other segment that you have, the $2 million - $2.05 million, is that all OEM revenues from Asahi.

Jeffrey H. Burbank

Yes.

Kevin Ellich - Piper Jaffray

Okay, sounds good. Thanks guys.

Operator

Our next question comes from Margaret Kaczor with William Blair.

Margaret Kaczor - William Blair

Good morning guys. Couple of quick questions from me. Help us run through the ROI of the Kidney Care Centers, so, how many patients do you need to hit, kind of double-digit ROI and do you think that, it can actually deliver higher return from the traditional biopsy centers, and so, how you get there, how quickly more detail maybe beyond kind of that $1 million in open and $1 million in expense that we got in the past?

Jeffrey H. Burbank

Well, I think, we're still on that model, we're still really in the game on that one. So, the million dollars to 12 to 18 months we've talked about the breakeven. The 40 patient, again modeling a 40 patient capacity, there's nothing at this point that will get us off those, those kind of modeling metrics, breakeven point, somewhere in the 20ish patient, 20 patient count.

I think, our goal here is, with these centers and what we're doing is to get these things self funding breakeven and return cash back to the company. And, we believe that we're actually having, that's what these centers will do for us.

Margaret Kaczor - William Blair

Can we actually see a double digit ROI here, overtime, obviously not today, in the next 12 months but, is that something that we should be looking for or?

Jeffrey H. Burbank

Yeah. Over the long haul, I think, so, yes.

Margaret Kaczor - William Blair

Okay. And, how are patient rates tracking at these centers, so, are we talking more than handful of patients that's somebody is already, double-digits - and the one that have been for year…

Jeffrey H. Burbank

The ones that are up longer like St. Louis, perhaps a handful, they're tracking on that, on that patient growth rate. So, again, it's very early Margaret, but, when we look at those lines of patient growth versus time, we're right on track.

Margaret Kaczor - William Blair

So, if we think about the 12 to 18 months, that you alluded and maybe to get those to breakeven, that gets you to about the 20 patients, am I connecting with you.

Jeffrey H. Burbank

That's the line we're describing, right?

Margaret Kaczor - William Blair

Okay. All right, so, Matt, can you talk a little bit about, little bit more about gross margins this quarter, its obviously there, better than we expected on mix, but how should we look at that on a full year basis, and how do those Kidney Care clinics play into margin, both in the next couple of quarters and in longer term?

Matthew W. Towse

You know Margaret, I was thinking about that, might be, I'm not sure how you model, all the models are built but it might be better to look at them by segments.

So, for System One, we did 47% in Q4, we popped up to 49% in Q1, I think as the year goes on over the yield, respective point or two or margin improvement year-over-year so you can kind of build that in to get to an average numbers for the year.

For Kidney Care and that impact obviously that's a negative to the 49% trend on System One, 47%. It's probably best to look at the absolute net loss on that and put that in to OpEx and into margin.

Margaret Kaczor - William Blair

Okay. It's helpful. One more question from me. Can you talk about kind of the average return for the consumer ramps up? How many did you finish this quarter, is it off mark to say that you have maybe an incremental two to three patients per round that you won't get otherwise?

Matthew W. Towse

No, we continue to be on the metric that we shared with you. So the cost haven't changed. The performance really hasn't changed, the number of patients to a tandem and conversions. So they are on track but what's changing this year is we're doing significant multiple of what we did last year.

Margaret Kaczor - William Blair

Okay. And the cadence was kind of even throughout the year or…

Matthew W. Towse

I'm sorry, I was talking over to you Margaret, what?

Margaret Kaczor - William Blair

I'm sorry, go ahead.

Matthew W. Towse

Just was going to share that, everything is on track in terms of performance and number and that's one of the contributors to growth.

Margaret Kaczor - William Blair

Okay. So, I mean the cadence growth was pretty even throughout the year or steady ramp I guess?

Jeffrey H. Burbank

Steady ramp a little bit.

Margaret Kaczor - William Blair

Okay. Thank you.

Operator

And I’m not showing any further questions at this time. I would like to turn the conference back to Jeff Burbank for closing remarks.

Jeffrey H. Burbank

Hey, thank you everybody. We are off to a good start and we'll look forward to talking with you at the end of Q2. Have a great day. Bye, bye.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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