Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q1 2024 Earnings Call Transcript

Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q1 2024 Earnings Call Transcript May 6, 2024

Tactile Systems Technology, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome, ladies and gentlemen, to the First Quarter 2024 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company’s prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company’s website for replay shortly. I would now like to turn the call over to Sam Bentzinger from Gilmartin Group for a few introductory comments. Please go ahead.

Sam Bentzinger: Good afternoon and thank you for joining the call today. With me from Tactile’s management team are Dan Reuvers, President and CEO; and Elaine Birkemeyer, CFO. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties, which could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report on Form 10-K as well as our most recent 10-Q filings to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website.

We undertake no obligations to publicly update or revise our forward-looking statements as a result of the new information, future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with general accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. With that, I’ll now turn the call over to Dan.

Dan Reuvers: Thanks Sam, and welcome everyone to our first quarter 2024 earnings call. Let me start by providing a quick agenda for today’s call. I’ll begin with a high level overview of our strong first quarter financial results and the key drivers of our sales performance, followed by some color on how we’ve advanced each one of our strategic priorities that we laid out in February. Elaine will then walk through our quarterly financial results in greater detail, and I’ll conclude with a few final thoughts before we open the call up to questions. With that, let’s turn to a review of our first quarter financial performance. Our total revenue grew 4% year-over-year to $61.1 million, in line with our expectations. We were pleased with this performance to start the year, given our strong first quarter results last year, and believe it provides a solid foundation to deliver on our 2024 operating plan.

Looking at our revenue performance by product line, lymphedema revenues increased 5% year-over-year to $52.3 million, and while our airway clearance revenues declined 4% year-over-year to $8.8 million, we demonstrated a second straight quarter of sequential improvement. Our lymphedema growth was in line with our expectations for the quarter, while sales of AffloVest were slightly ahead on a steeper year-over-year comp, reflecting broad based growth among most of our DME partners and lending confidence for the rest of the year. Beyond our revenue performance, we also continued to gain momentum down the P&L, specifically with respect to a 100% increase in adjusted EBITDA versus prior year. Our cash balance reflected another strong finish as we benefited from significant progress with our collections working down our accounts receivable, a key element of our 2024 strategy to drive continued free cash flow generation, while also deploying investments in our technology roadmap, which I’ll expand upon shortly.

With our financial highlights as a backdrop, I’d like to share a bit more about the operational progress we made in the first quarter. As we shared during our last update in February, we cited three key areas of focus for 2024, an investment in growing headcount and productivity within both our lymphedema and respiratory channels, along with expanding our AffloVest DME participation. We also described a series of tech-related investments intended to improve our customers prescribing experience, as well as our own internal effectiveness. And finally, we described a next-generation lymphedema therapy platform, as well as our commitment to conclude our head and neck study and share results near the end of the year. I’m pleased that we’ve moved every one of those initiatives forward in the first quarter, and we’ll share more color on each.

Beginning with our sales channels, from a headcount perspective, we ended the quarter with 269 field sales representatives, adding 15 since the beginning of 2024, and up approximately 9% in comparison to the 246 representatives that we had at the end of the first quarter of last year. These added reps came on later in the quarter, and we look forward to their increasing contributions in the second half of the year once they’re fully trained. Productivity continued to advance among our legacy reps during the first quarter, specifically by continuing to focus on reducing the amount of time our reps spend on non-selling activities like in-home patient demos. As a reminder, our reps have historically devoted a significant portion of their time conducting payer required in-home patient demos and obtaining the necessary documentation to complete orders and submit claims, a necessary task, but it clearly limits their time with prescribing clinicians.

Our patient training staff is well equipped to introduce our therapies to patients and educate them on its use. Thus, we’ve been focused on assigning more of these home based demos to them. This was a significant contributor to sales productivity gains last year as we started 2023 with the sales force performing the majority of these pre-sales demos in the home and ramped to approximately 30% of them performed by our trainers by the end of last year. In the first quarter, we continued that momentum, completing 35% of in-home demos by trainers, allowing our reps to benefit from the added selling bandwidth. During the first quarter, we also continued to see a favorable response to our recently introduced products, particularly our Entre Plus system.

With Entre serving as the entry level treatment that many payers require the patient to try first, including Medicare. Our focus on serving the patient wherever they enter the therapeutic funnel continues to pay dividends. We also saw a solid reception from our recently launched ComfortEase garments to treat lymphedema for upper extremities, bringing relief to even more breast and head and neck cancer survivors. Before shifting to an update on airway clearance, it’s worth noting that we achieved our lymphedema results in the first quarter, despite being among the many healthcare companies impacted by the change healthcare, cybersecurity breach within UnitedHealthcare’s Optum branch that occurred earlier in the quarter. On February 21, we were notified of a cyber event at Change, a third-party provider of technology used to verify patients benefits and bill for medical insurance claims that led them to disconnect certain IT systems and services with customers, including Tactile Medical and Brightree, our external billing provider.

We’ve been using Change Healthcare for electronic verification of patient benefits, while our actual claims processing and billing is conducted using Brightree. Upon learning of the cyber event, our team acted swiftly to address these operational gaps, pivoting to a new partner within days to conduct electronic benefits verification. While Brightree was impacted by the cyber event, we again promptly found alternative ways to continue submitting claims, thereby further minimizing the impact on our patients, cash collections and our broader operations. I’m proud of the way our entire team swiftly responded to this situation and believe it reflects the leadership in place at Tactile. To have achieved our lymphedema growth this quarter with minimal disruption to both patients and our operations in the face of these unforeseen headwinds is a testament to our commitment to our tech-forward strategy and how nimble our organization has become.

Now, a few comments on our airway clearance progress. As I mentioned earlier, our first quarter airway clearance results were slightly better than we expected, thanks to the broad-based strength among most of our DME partners. In fact, excluding the one large DME affected by the PHE waiver that we’ve discussed earlier, collective revenue from all other DME customers increased over 20% in the first quarter as compared to the first quarter of 2023. With respect to the DME customer whose ordering was particularly affected by the PHE waiver, we were pleased to see shipments continue to stabilize in the first quarter. Over the long-term, we continue to expect sustained growth from AffloVest, our airway clearance system, particularly following the anniversary of the PHE waiver expiration this May, when we anticipate the affected distributor lapsed the issue and no longer serves as a headwind to our growth.

We remain focused this year not only on expanding our AffloVest sales specialist count, but also onboarding additional DMEs and demonstrating how AffloVest can be a valuable new offering for their large base of existing complex respiratory patients. To that end, we made further investments during the first quarter in our sales specialist staff, increasing the number of airway clearance reps to 17 from just 12 a year ago. These investments in our sales team will help increase our coverage of existing DME customers as we educate, train and support their reps on bronchiectasis and the role of AffloVest in their care, as well as to enlist even more branches to make AffloVest part of their treatment arsenal. Turning to an update on another of our key focus areas for 2024, a number of our tech-related investments advanced in the quarter.

As we shared during our February update, we’re making strategic technology investments this year, while still demonstrating leverage in our P&L and they’re progressing well. A portion of these investments involve enhancing various back office processes, including our method of verifying patient benefits. As I mentioned earlier, we’ve recently transitioned to a new, more efficient electronic method of verifying benefits, intended to accelerate order processing. Separately, we’ve begun piloting an e-prescribing platform to streamline how we collect and exchange patient medical records with payers during the prescription process. This is intended to make documentation and authorization easier for healthcare providers, as well as our sales and internal teams.

We also expect this to support our goal of maximizing our first pass claims approval with Medicare, an area we’ve already made significant progress over the last 18 months. As an update on Medicare, we continue to monitor the introduction and administration of the new Lymphedema Treatment Act. While we remain encouraged that it will bring more awareness and access for basic or conservative therapies, we continue to watch for any impact as the policy’s interpretation emerges among Medicare administrators. That said while our own local coverage determination or LCD has been in place for many years for lymphedema pumps, we’ve seen some subtle changes in how Medicare administers the policy. Our own movement toward an e-prescribing tool is intended to even more efficiently pair the necessary documentation with their adjudication process, striving for more efficiency among all parties.

In fact, our recently deployed pilot across a handful of regions is off to an encouraging start. This tool will make the order and prescribing process easier for HCPs while also positively impacting our sales force productivity. Given our reps and back office would need to spend less time gathering patient documentation. While broader deployment isn’t expected until later in the year, we’re excited about the impact it can have on our business in 2025. We also remain on track to introduce a new customer relationship management tool or CRM, later this year. While we have an incredible amount of data, we know that optimizing it for our users can improve internal communication, sales productivity and ultimately growth. Among the benefits in mind, we expect to provide better visibility to both our sales and trainer teams so we can more efficiently assign and fulfill demos and trainings.

A CRM, along with Kylee is also expected to help us follow each patient’s journey, ensuring we introduce the right progression of therapy based on their progress. Our sales force is excited about these new tools and the ability to ultimately advance customer orders faster. Our product development efforts continued to advance as well. Development on our next-generation lymphedema therapy platform remains on track for a late 2024 introduction. It’s expected to bring a host of new lifestyle friendly attributes to patients, even further improving the user experience and demonstrating our ongoing leadership in this space. We also continued to see patient uptake of our Kylee mobile application during the first quarter. At the end of the first quarter, we had over 26,000 unique user profiles registered in Kylee.

Moreover, we saw almost 50,000 user check-ins during the quarter. As a reminder, the Kylee application provides direct access to education resources and tools for patients to track symptoms and their disease progression. We continue to believe Kylee is an important part of their therapy experience. Now a few updates on our clinical education and clinical evidence progress. On the heels of a record year for medical education in terms of patient and clinician engagement, we started 2024 off even stronger, reaching over 3,000 clinicians in the first quarter alone across our lymphedema and AffloVest product lines. Our first quarter medical education programming was specifically focused on lymphedema and bronchiectasis diagnoses, their comorbidities and available treatments.

We also hosted a number of targeted CEU eligible education events for respiratory therapists focused on specific patient populations, including bronchiectasis that drew over 200 attendees, as well as training on detecting radiation fibrosis for oncology clinicians that attracted over 400 attendees. In addition to our progress on education, we continue to fortify the clinical evidence supporting the impact of our products on lymphedema patients. During the first quarter, we completed enrollment in our multicenter randomized control clinical trial, evaluating Flexitouch Plus for the treatment of lymphedema among head and neck cancer survivors. With enrollment complete as of the end of last month with 235 patients, we now move to following these last in patients for six months before tallying all of the results.

As a reminder, this trial compares the effectiveness of Flexitouch versus standard of care over a six month duration. Outcome measures include both physical improvements as well as biosocial, quality of life results. With over 400,000 oral cavity and pharynx cancer patients currently living in the United States and the majority likely to have or develop lymphedema, we remain committed to providing a more available path for those needing and seeking treatment. We’re proud and enthusiastic about this trial so far as it represents the largest randomized clinical trial ever conducted among head and neck lymphedema patients. The study has 10 enrolling sites, including preeminent cancer institutions like Vanderbilt, Johns Hopkins and Rush University Medical Center.

Given the six month patient follow up period, we expect initial results from the trial to be available near the end of the year and look forward to sharing additional details with you once available. We were also pleased to see results from a new clinical study among VA patients published in the Journal of Vascular Surgery last month. The study, a foresight multicenter trial, followed 179 veterans with lymphedema that were being treated with Flexitouch. This is the largest ever peer reviewed prospective study among lymphedema patients using pneumatic compression therapy. Among the statistically significant findings, patients using Flexitouch therapy demonstrated improvements in quality of life as well as decreases in cellulitis events and limb girth and improvements in skin changes.

Patients were evaluated at four intervals over 52 weeks, and while compliance to self MLD was well below 10% among subjects, it reflected 92% compliance with their Flexitouch at four weeks and 72% remained compliant five to seven days a week, even after a full year of therapy. These results not only reinforce the clinical efficacy of Flexitouch on patients with varied disease levels, but also underscore how the positive results patients experience with our therapies yields high compliance. Overall, I’m proud of the work our team accomplished surrounding all of our education and research initiatives and I look forward to continuing to raise awareness at each of the payer, clinician and patient levels as we progress through the year. With that, Elaine will now review our first quarter financial results in more detail.

Elaine?

Elaine Birkemeyer: Thanks Dan. Unless noted otherwise, all references to first quarter financial results are on a GAAP and year-over-year basis. Total revenue in the first quarter increased $2.2 million or 3.8%, to $61.1 million. By product line sales and rentals of lymphedema products, which includes our Flexitouch and Entre systems increased $2.6 million or 5.1% to $52.3 million, and sales of our airway clearance products, which includes our AffloVest system decreased $319,000 or 3.5% to $8.8 million. Continuing down the P&L. Gross margin was 71.1% of revenue compared to 70.5% in the first quarter of 2023. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods was 71.6% compared to 71% in the prior year.

The increase in non-GAAP gross margin was attributable to lower manufacturing and freight costs. First quarter operating expenses increased $1.1 million, or 2.5%, to $46.4 million. The change in GAAP operating expenses reflected a $1.1 million increase in sales and marketing expenses and a $0.8 million increase in reimbursement, general and administrative expenses. These items were partly offset by a $0.7 million decrease in non-cash intangible asset amortization and earn-out expense. Operating loss decreased $0.8 million, or 22.1% to $3 million. The decrease in operating loss was driven by a $2 million, or 4.7% increase in our gross profit, offset by the aforementioned $1.1 million increase in operating expenses. Non-GAAP operating loss decreased $0.5 million, or 22.3% to $1.7 million.

As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and earn-out expense, as well as certain non-recurring operating expenses. We provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other income net increased $1.1 million, or 115.6% to $0.2 million. The increase was due to higher interest income and lower interest expense, primarily driven by the retirement of a revolving line of credit at the end of 2023. Income tax benefit decreased $2.3 million or 79.4% year-over-year to $0.6 million driven primarily by a lower taxable loss. Net loss increased $0.3 million or 17% to $2.2 million or $0.09 per diluted share, compared to $1.9 million or $0.09 per diluted share. Non-GAAP net loss increased $0.6 million or 87.6% to $1.3 million compared to $0.7 million.

Adjusted EBITDA doubled to $1 million, or 1.7% of sales, compared to $0.5 million or 0.9% of sales. With respect to our balance sheet, we had $60.7 million in cash and cash equivalents and $28.5 million of outstanding borrowings at quarter end. This compares to $61 million in cash and $29.3 million of outstanding borrowings as of December 31, 2023. We are pleased to see our cash position remain relatively constant since the end of 2023. This is particularly noteworthy when considering the one-time impacts in Q1 from several cash outflow items, including $6.6 million related to our annual bonus payout. As Dan mentioned earlier, our team made significant progress this quarter with cash collections and working down our accounts receivable balance even further, both of which help offset the one-time cash outflows as well as our strategic investments.

Turning to a review of our 2024 outlook, which we reaffirmed in our earnings press release today. We continue to expect full year 2024 total revenue in the range of $300 million to $305 million, representing growth of approximately 9% to 11% year-over-year. As a reminder, our 2024 total revenue guidance range assumes that growth in both our lymphedema and airway clearance product lines will be in a similar range. For modeling purposes for the full year 2024, we expect our-GAAP gross margins to be up slightly as compared to prior year. Our GAAP operating expenses to increase low double digits as we advance our tech-related investments throughout the year. Interest income of approximately $0.4 million, a tax rate of 30% and a fully diluted weighted average share count of approximately 24 million shares.

We also continue to expect to generate adjusted EBITDA of approximately $33 million to $35 million in 2024. Our adjusted EBITDA expectation assumes certain non-cash items, including stock compensation expense of approximately $8.3 million, intangible amortization of approximately $3.9 million, and depreciation expense of approximately $3 million. With that, I’ll turn the call back to Dan for some closing remarks. Dan?

Dan Reuvers: Thanks, Elaine. The first quarter was another opportunity for us to demonstrate continued progress across our key financial and operational priorities. I’m pleased with how the company is set up for further execution through 2024 and especially proud of the way our team continues to lead through change, all with the goal of delivering the best products and therapy possible for lymphedema and bronchiectasis patients. Before concluding our prepared remarks, I’d like to comment on the press release we issued on April 23 announcing my retirement as of the end of June and the appointment of Tactile board member Sheri Dodd as the company’s next Chief Executive Officer, effective July 1. Sheri has an extensive track record as a healthcare industry veteran, having served in leadership roles across companies such as Medtronic and Johnson & Johnson, where she focused specifically on the chronic care space and developed health economics and reimbursement expertise.

She’s also developed a deep familiarity with our business through her service as a member of our Board of Directors since 2021. As a board member, she’s contributed a thoughtful perspective to our current direction and her experience will undoubtedly enable her to quickly focus on advancing strategies to drive Tactile’s next phase of growth. I’m excited to welcome her to her new operating role and look forward to working with her to ensure a smooth, uninterrupted transition. Personally, I’m excited about my next chapter, including more time with my family, but I’ll remain as an advisor to Sheri following our transition, as well as continuing to serve on our Board of Directors. Indeed, I remain heavily vested in the ongoing success of Tactile Medical and my interests remain aligned in delivering shareholder value.

Stepping back I’m proud of what we’ve achieved during my tenure at Tactile, we refreshed our best-in-class product portfolio across pneumatic compression segment, added HFCWO of vest therapy to treat bronchiectasis, advanced clinical evidence, and served thousands of new patients in both segments. We also assembled a world class leadership team, strengthened our balance sheet, and have delivered solid growth in both revenue and profitability. Our progress and momentum underscore my confidence in Tactile’s future. I believe the company is well positioned and on track for delivering consistent, sustainable and profitable growth in 2024 and beyond. We have clear and actionable initiatives in place to help fuel this growth and the right leaders in the right seats to execute it.

I’d also like to take this opportunity to thank the Tactile Team. It’s been humbling to have been able to attract such capable talent across the organization, and the passion they bring to our mission every day is inspiring. I’m certain they’ll continue to deliver for patients and shareholders. And with that operator, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from Adam Maeder with Piper Sandler. Please proceed with your question.

Adam Maeder: Hi, Dan and Elaine. Good afternoon and thank you for taking the questions. Congrats on the nice start to the year. And Dan, it’s been a pleasure. Certainly wishing you well in retirement. I wanted to start on the modeling side for you, Elaine or Dan, but wanted to ask about phasing of quarterly revenue for the rest of the year. And for Q2, specifically, I show consensus at about $73 million, which is, I think, close to a 20% increase sequentially quarter-over- quarter. So wondering if you have any comment to the phasing of revenue on the top-line? And then similar question as it relates to adjusted EBITDA. I know margins in Q1 are seasonally weaker, but just help us kind of bridge to that $33 million to $35 million guidance for the full year 2024. And then I had a follow up. Thanks.

Dan Reuvers: Yes, thanks, Adam, for the questions. I’ll take a shot at the beginning and let Elaine kind of back clean up on this one. But I’d say that we continue to provide, as we’re happy to reinforce our guidance for the full year. Not going to necessarily provide quarterly guidance, but I think it’s fair to expect some modest improvements in growth in both our pneumatic compression as well as in the AffloVest category as well. So, as is typical, you’d typically see some ramp into the key into the second quarter and sequential improvements in revenue each of the next three. So, I don’t think anything terribly out of the ordinary and some of the kind of step up that we’ve seen in the past. I think you had a question about operating income as well. I think I’ll let Elaine can take that [ph].

Adam Maeder: Yes. Yes.

Elaine Birkemeyer: Yes. I think as you mentioned, our first quarter, we are always the leanest in terms of profitability. So, this followed a very similar pattern. But we were pleased to see that adjusted EBITDA did double from a year-over-year perspective. And as in years past, that adjusted EBITDA margin does continue to build.

Dan Reuvers: Yes. Typically, the back half is where we end up realizing the majority of our operating contribution. It’s been that way for the last few years. I think we were just happy to be able to see a healthy, positive number in the first quarter, which hasn’t always been the case.

Adam Maeder: Yes. Good color there, guys. Thank you for that. And for the follow-up, wanted to ask about head and neck, I guess multi part question here. First, can you just remind us that the key objective for that trial, I believe it’s to develop clinical evidence to support payer coverage, but wanted to confirm that. And then when should we think about a potential contribution or impact commercially to your business? Assuming a positive trial, is that beginning of 2025, back half of 2025, presumably there’s some blocking and taxing with payers. And lastly, would you expect this to be a Tactile specific benefit, or would this lift the entire lymphedema category for head and neck? Thanks so much for taking the questions.

Dan Reuvers: Yes. Thanks. Thanks for the question. Just to remind, there’s about over 400,000 head and neck lymphedema patients or survivors in the United States. Evidence points to about 90% of them have or will develop lymphedema. The study that we just completed enrollment on 235 patients, which is about 10 times as big as the pilot study we did a few years ago with really compelling results. We knew that a bigger n was likely going to be necessary to persuade the right audiences. And when you talk about who is the end market for this data, it’s really threefold. Certainly, the first one is the payer. We want to make sure that we’re demonstrating the kind of evidence that we think that a study like this can that makes sure that availability for patients becomes more readily accessible.

We think that compelling outcomes should also influence HCPs and the ability to ensure that their screening for lymphedema and treating it when presented is an important step where it’s not necessarily commonplace in an awful lot of practices, even in some really well regarded cancer facilities. And then certainly I think the patient awareness can benefit from this one as well. I think from a contribution standpoint, there’s a six-month follow-up after the last patient in, which was just about the end of April. So we have to go ahead and fulfill that period, and then we can start to see the data assembled and turned into some kind of a manuscript that can be made publicly available and either presented and or published. It’s probably a back half 2025 contributor, but we ultimately believe that this one will have material impact, I think, on our business.

And I think the last part of your question is a particularly encouraging one. While sometimes rising tide lifts all boats, this is one that we think will particularly benefit from because we actually shared a year or so ago, we got some new IP issued that really ring-fenced that part of the body. So any compression, pneumatic or otherwise, that treats the head and neck region of the body. We feel like we’ve really got that space protected. So this was an investment in helping more patients, but also one that we think we will uniquely benefit from.

Adam Maeder: Thanks for the color, Dan.

Operator: Thank you. Our next question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.

Margaret Kaczor: Hey, good afternoon, guys. Thanks for taking the question. I guess just to start, it’s partly a guidance question, partly a growth outlook question, but how do you get to the high and low end of the guidance? And I want to focus maybe a little bit more on lymphedema. How should we think about the cadence of impact for the new sales reps that you hired? Obviously not a huge impact this quarter, maybe not huge next quarter. But as we get towards the second half of the year, is that the right timing or further out? And just in general, as we think about the catalyst for lymphedema, how does this get to be that sustainable, low double digit plus growth? I don’t know if you can point to touch points to clinicians, what’s the relative number of that 3,000 new products, et cetera. Just trying to frame that up a little bit.