Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q3 2023 Earnings Call Transcript

Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q3 2023 Earnings Call Transcript November 6, 2023

Tactile Systems Technology, Inc. beats earnings expectations. Reported EPS is $0.94, expectations were $0.03.

Operator: Welcome ladies and gentlemen to the Third Quarter of Fiscal Year 2023 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. 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 factor section of our annual report on Form 10-K, as well as our most recent 10-Q filing 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 obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliation 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. Today’s call will be hosted by Dan Reuvers, Tactile Medical’s President and Chief Executive Officer along with Elaine Birkemeyer, Tactile’s Chief Financial Officer.

And I would now like to turn the call over to Mr. Reuvers. Please go ahead, sir.

Daniel Reuvers: Thanks, operator, and welcome everyone to our third quarter earnings call. I’ll start with a quick agenda of what we intend to cover today. First, I’ll review our financial results at a high level and the key drivers of our performance in the quarter, along with some recent operational highlights. Elaine will then cover our financial results in greater detail as well as our 2023 financial guidance, which we updated in our earnings press release today. And then I’ll share some additional thoughts regarding our outlook and strategic priorities before we open the call for questions. So beginning with a review of our financial performance, I was really pleased with our team’s performance in the third quarter with $69.6 million of total revenue.

We posted our fourth quarter in a row of double digit lymphedema growth and exceeded our overall revenue and profit expectations for the quarter. Our growth was driven by strong performance in our lymphedema product line with lymphedema revenue increasing 15% year-over-year to $62.5 million and exceeding our expectations for the quarter. This performance was partially offset by softer than expected sales of our airway clearance products, which decreased 36% year-over-year to $7.1 million. In addition to our solid total revenue performance, we also achieved another quarter of profitability with year-over-year improvements in both our net income and adjusted EBITDA. As a result of our revenue growth and profitability improvements, we generated $4.1 million of cash flow from operations, ending the quarter with $66 million in cash as we continued to improve our balance sheet.

With our Q3 financial highlights as a backdrop, I’ll now cover the primary drivers of our revenue performance in a bit more detail, beginning with our lymphedema product line. Our strong lymphedema sales growth in the third quarter continued to reflect the increasing productivity of our field sales team, which again delivered double-digit growth, even as our sales headcount remained consistent throughout 2023, with 246 reps at quarter end, relatively unchanged compared to the beginning of the year. In recent quarters, our efforts to increase the productivity of our sales reps is focused on two major components: improving the operational efficiency of our selling organization; and enhancing our portfolio through the development and introduction of new products.

Our focus in recent quarters has been on reducing the time our sales reps devote to non-selling activities, freeing them to optimize time with prescribers and clinics. Specifically, our reps have historically devoted a significant portion of their time to conducting in-home patient demos and obtaining the necessary documentation to complete those orders and submit claims. With respect to the in-home patient demo process, we’ve been transitioning some of this responsibility to our patient trainers who are well equipped to introduce our therapies to patients and educate them on its use. This shift was an important contributor to our sales performance again in the third quarter and we see additional runway to drive incremental productivity gains over the coming quarters as we seek to expand this initiative.

Our efforts to improve productivity within the back office team included beginning to deploy new digital tools, such as optical character recognition for order input. This is consistent with our goal to introduce new technology and tools to even further improve our operational efficiency. Our sales team also continues to benefit from the introduction of new products, most notably our next-generation Entre Plus system and our ComfortEase garments. We continued to see significant commercial traction of our Entre Plus system during the third quarter as we progressed through the initial months following its full market release in March. The addition of Entre Plus to our portfolio, the first generational update to our Entre system since its introduction has energized our team to engage with prescribers, showcase its user-centric enhancements, and work with them to identify appropriate patients.

As a reminder, Entre Plus delivers the same clinically proven therapeutic benefits of our original Entre system, while offering a host of enhanced features to improve the user experience, including new LCD-based interface, active garment deflation, and the ability to treat two limbs simultaneously. Patient feedback has been consistently positive throughout the initial months of commercialization, affirming that Entre Plus represents an important enhancement to our product portfolio. The development and introduction of Entre Plus is part of our increased focus as an organization on the subset of our addressable patient population that qualifies for a basic pneumatic compression device. A significant portion of patients, including most covered under Medicare, are required by their insurer to obtain and treat their lymphedema with a basic compression device before they may ultimately become eligible for an advanced pneumatic compression device like our FlexiTouch.

We’re pleased to provide these patients with an optimized product to address their needs, while establishing brand awareness at the patient level in the process. As a reminder, our Entre Plus system was also designed to be part of a consistent product family with our FlexiTouch Plus, enabling Entre Plus users to easily transition to our advanced pneumatic compression offering if their disease progression ultimately warrants it. At the beginning of the third quarter, we also initiated the full market release of our ComfortEase upper extremity garments, the latest addition to our FlexiTouch Plus portfolio since the introduction of our ComfortEase lower extremity garments last year. Our ComfortEase garments are designed to make them easier to put on and take off and enhance comfort and treatment.

As part of the redesign of our upper extremity garments, our team sought to expand their therapeutic coverage capabilities. Our new upper extremity garments can now accommodate bilateral upper body coverage. Coverage of the axillary region, an important but historically difficult area of the body to provide effective therapy to has been enhanced as well in order to optimize the treatment of breast cancer related lymphedema. In our post-market patient monitoring of 260 patients, we were pleased to find that our ComfortEase upper extremity garments achieved 100% coverage of each patient’s treatment area in all cases. The feedback we’ve received from clinicians and lymphedema therapists has emphasized their appreciation for the new design of our upper extremity garments and the improved coverage and therapy they provide.

In short, through our combined focus on operational efficiency and new product innovation, we’re pleased to drive 15% growth year-over-year in sales and rentals of our lymphedema products, while reducing our sales and marketing expense. Turning to our airway clearance product line, our year-over-year sales performance in the third quarter continued to be impacted by the dynamic we discussed on our earnings call in August, with one large DME customer experiencing slowed placements of our AffloVest system. As a reminder, May 11th saw the expiration of the COVID-19 public health emergency or PHE waiver and a return to pre-public health emergency eligibility requirements. This large DME customer was one of the few we partner with that took advantage of the relaxed eligibility requirements under the PHE waiver.

Transitioning their organization and referral base to the additional documentation and testing needed under the pre-public health emergency requirements has continued to pace their processing and placements of our AffloVest system this year. Importantly, we continue to see growth in third quarter across the rest of our DME customers. Specifically, revenue from our other DME partners grew in the double digits year-over-year. We’ve also taken additional proactive steps to mitigate the impact on our airway clearance product line. During the third quarter, our team worked to raise awareness of a publication in the June edition of RT Magazine. This publication, which I discussed on our last call, summarized the results of a blinded randomized study demonstrating patients’ preference of AffloVest over three other high-frequency chest wall oscillation devices.

We believe it provides an important resource for DME reps to feature in their discussions with prescribers, facilitating their ability to convert accounts that may currently prescribe competing devices. We also are adding several members to our team of dedicated DME reps in the fourth quarter, increasing our coverage of the existing DME customers as we educate and train their reps on bronchiectasis and the role of our AffloVest in its treatment. We hired a dedicated reimbursement expert as well to support our DME customers while freeing up additional bandwidth for existing reps. Looking ahead, we expect the expiration of the PHE waiver will remain an ongoing headwind to the performance of this large DME customer until they reach its anniversary in May of next year.

With that said, it’s important to note that we continue to be an — they continue to be an engaged partner. We remain pleased with the performance we’re seeing across the rest of the customer base, and we continue to expect that this return of eligibility requirements will not impact our growth long-term. Turning to a discussion of our operational highlights during the third quarter, in addition to the positive perception of Entre Plus and ComfortEase garments, we continue to expand the features, awareness, and adoption of our Kylee mobile application. Since we debuted Kylee last year, we’ve introduced additional updates to expand and enhance its capabilities. We continued this cadence during the third quarter, providing patients with the ability to set up and customize multiple treatment reminders and introducing utilization-based motivational messages to encourage and congratulate them for fulfilling their treatment regimes.

We also added new support features, making it easier for patients to directly communicate with our team. Our continued product development and raising awareness efforts culminated in the strong growth in patient adoption with over 11,000 new downloads year to date in 2023. From a utilization standpoint, we also saw growth in the number of user check-ins, which increased to over 110,000 here to date. And during the third quarter, our Kylee users also captured more than 10,000 measurements to monitor their condition and disease progression. All of this continues to enrich our database of those suffering from lymphedema as well. By driving awareness and adoption of our Kylee app, along with our Entre Plus system, we’re developing our relationship with patients throughout their journey to diagnose and access effective treatment, enhancing our market leadership position in the lymphedema space.

In addition to enhancing our patient engagement and education efforts, we continue to raise awareness at the clinician level. During the third quarter, we hosted over 30 professional education programs, which drew participation from more than 1,300 clinician attendees. Most notably, our programming included a symposium at the UIP 2023 World Congress, a leading medical conference devoted to venous and lymphatic medicine organized by the American Vein and Lymphatic Society and the American Venous Forum. The symposium was titled Pneumatic Pump Bootcamp, Everything You Wanted to Know. It was hosted by five prominent physicians, including our recently appointed Chief Medical Officer, Dr. Tony Gasperis. They discussed the differences between basic and advanced pneumatic compression devices and walked clinician attendees through the process of identifying patients, pump selection, and a better understanding of reimbursement criteria and eligibility.

It ended up being a standing room only event and was very well received by attendees. We also saw progress in patient enrollment within our randomized clinical trial of head and neck cancer survivors. We now expect to have 180 patients enrolled by year end with the goal of reaching 200 by the end of Q1 of 2024. This represents the kind of evidence-based investment we’ve become known for and hope to use the eventual results to expand access for this significant underserved segment of those suffering from lymphedema. Lastly, we enhanced our board of directors with the appointment of Dr. Vindell Washington. Dr. Washington currently serves as Chief Clinical Officer for CARE at Verily, a health technology company owned by Alphabet. He brings over 30 years of experience in the healthcare industry to our board, including senior leadership positions with Blue Cross Blue Shield of Louisiana and the U.S. Department of Health and Human Services.

We look forward to benefiting from his extensive experience across multiple facets of the healthcare industry, as well as his track record in helping companies to develop and enhance their clinical and digital strategies. With that, Elaine will now review our third quarter financial results in more detail.

Elaine Birkemeyer: Thanks, Dan. Turning to review of our financial results. Unless noted otherwise, all references to third quarter financial results are on a GAAP and year-over-year basis. Total revenue in the third quarter increased $4.3 million or 6.6% to $69.6 million. By product line, sales and rentals of lymphedema products, which includes our FlexiTouch and Entre systems, increased $8.3 million, or 15.3% to $62.5 million. And sales of our airway clearance products, which includes our AffloVest system, decreased $4 million, or 35.9% to $7.1 million. Continuing down the P&L, gross margin was 70.9% of revenue compared to 71.7%. Non-GAAP growth margin, which excludes non-cash and tangible amortization in both periods was 71.4% compared to 72.2%.

GAAP and non-GAAP gross margins in the third quarter of 2023 were impacted by changes in our mix related to strong growth and sales of our Entre Plus system and lower AffloVest sales along with higher labor rates and material costs. Third quarter operating expenses decreased $7 million or 14.5% to $41.4 million. The decrease in GAAP operating expenses was driven by a $7.1 million decrease in non-cash and tangible asset amortization and earn-out expense, and a $0.6 million decrease in sales and marketing expenses. These items were offset partially by research and development and reimbursement general and administrative expenses, which increased by $0.4 million and $0.2 million, respectively. Operating income was $8 million compared to an operating loss of $1.6 million.

The $9.6 million improvement in our operating income was driven by a $2.6 million or 5.5% increase in our growth profit, as well as the aforementioned $7.7 million or 14.5% decrease in our operating expenses. Non-GAAP operating income was $5.2 million compared to $3.9 million in the third quarter of 2022, a 34% increase year-over-year. As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and earnout expense, as well as certain non-reoccurring operating expenses in the prior year period. We have provided a detailed GAAP to non-GAAP reconciliation in the earnings press release. Other expense net was $0.4 million compared to $0.7 million last year. The decrease is primarily due to an increase in interest income.

Income tax benefit was $14.7 million, compared to $77,000 in the third quarter of 2022. The year-over-year change in income tax was driven by a one-time adjustment for releasing our evaluation allowance. This non-cash impact reflects our projected return to more consistent profitability. Net income increased $24.6 million to $22.3 million or $0.94 per diluted share. Non-GAAP net Income increased $18.4 million to $20.2 million compared to $1.9 million in the third quarter of 2022. Adjusted EBITDA increased $0.5 million to $7.7 million or 11.1% of sales compared to $7.2 million or 11% of sales last year. Turning to the balance sheet, we’re pleased with our continued improvements here. As of quarter end, we had $66 million in cash and cash equivalents and $46.8 million of outstanding borrowings.

This compares to $21.9 million in cash and $49 million of outstanding borrowings as of December 31, 2022. Shifting to a review of our 2023 outlook which we updated in today’s press release. We now expect full year 2023 total revenue of approximately $273 million to $277 million representing year-over-year growth of 11% to 12% compared to our prior guidance of 11% to 13%. Our 2023 total revenue guidance range now assumes sales and rentals of our lymphedema products increase approximately 14% to 15% compared to our prior expectation of 13% to 14% increase. And sales of our airway clearance products decreased approximately 9% to 8% versus our prior expectation of a 0% to 5% increase. These updated growth assumptions reflect better than expected sales of our lymphedema products in the third quarter.

They also reflect softer sales of our airway clearance products in the third quarter and reduce expectations for the fourth quarter as well, as we continue to face the headwind related to the large [indiscernible] customer that Dan discussed through May of next year. For modeling purposes for the full year 2023 we expect our GAAP gross margins to be approximately 71%, our GAAP operating expenses to be down approximately 4% year-over-year compared to our prior expectation of a flat to down 1% year-over-year. Interest expense of approximately $2.6 million compared to our prior expectation of $3.8 million. We now expect a benefit on the GAAP tax line at a rate of 112% to 139% compared to a tax expense rate of 57% previously. The change in expectation is primarily the result of evaluation allowance removal in the third quarter and a fully diluted weighted average share count of approximately 23.5 million shares.

We continue to expect to generate adjusted EBITDA of approximately $25 million to $27 million in 2023. Our adjusted EBITDA expectation assumes certain non-cash items, including stock compensation expense of approximately $7.7 million compared to $9.8 million previously, Intangible amortization and changes in fair value of contingent consideration of approximately $100,000 to $150,000 compared to our prior expectation of approximately $5.8 million. The depreciation expense of approximately $2.8 million compared to approximately $2.5 million previously. With that, I’ll turn the call back to Dan for closing remarks.

Daniel Reuvers: Thanks, Elaine. Stepping back, we’re pleased to have delivered solid financial performance in the third quarter, with revenue growth in our lymphedema business of 15% year-over-year, record operating profit and expanded cash flow from operations. Our financial results demonstrate the improved productivity of our sales team, as well as our enhanced operational efficiencies overall. In Q4, our teams focused on bringing 2023 to a strong conclusion and by continuing to execute on the following four strategic initiatives for this year: improve the productivity of our lymphedema field sales team; expand airway clearance therapy through broadened DME relationships; introduce new products and innovations to address the lifestyle needs of our patients, improving digital functionality and optimizing therapy; and finally enhancing our operational efficiency to reduce our cost to serve, while maintaining strong patient satisfaction.

Lastly, with demonstrated progress towards our multi-year strategic and financial goals, along with an enhanced balance sheet, we remain confident in our ability to deliver sustainable long-term growth and value creation as we continue to expand our market share by empowering patients to care for themselves at home. And before we open the call for questions, I’d like to briefly address the subject of GLP-1 medications for weight loss and our perspective on its potential impact on those suffering from lymphedema. This afternoon we posted information on the events and webcast section of the investor page of our website. While the information we assembled is intended to provide some additional context, it’s clear that rich third-party data on this topic is scant.

That said, I wanted to call out a few of the key points from the information we assembled on our slides. I’ll start with a reminder that the data points to a universe of approximately 20 million Americans suffering from lymphedema. The evidence also indicates that lymphedema can be either congenital or more often the consequence of comorbidities, including cancer, venous disease, trauma, and obesity, among others. However, tying the incidence rate to body mass index, or BMI, is difficult from the currently published data. Thus, we attempted to frame the patient base in two ways. First, we broke down the lymphedema community into segments based on the available literature. But perhaps more importantly and relevant was the second view we assembled, which breaks down our own patient data, arguably the largest source within this patient population.

In fact, we broke down our year-to-date patients of over 50,000 based on BMI, among other things. Literature suggests that obesity plays a more significant role in the development of lymphedema once BMI exceeds 40 and can be the primary cause only when BMI exceeds 50. Once we isolated cancer survivorship as the primary cause within our own database, we found that only 8% of our current patients had a BMI over 50 and an additional 16% above 40. While there’s more detail in the data we posted on our site, our own demographic data of over 50,000 patients underscores that lymphedema diagnosis and those seeking care to treat it is far from limited to the severely obese. And even if these weight loss drugs deliver the promise that we all hope for, the consequence of lymphedema is expected to remain for millions of patients, a reality that continues to energize our mission to reveal and treat patients with underserved chronic conditions.

I’d like to thank everyone on the Tactile team for their efforts this past quarter, and to our customers, suppliers, shareholders, as well, for helping to support our mission. With that, operator will now open the line for questions.

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Q&A Session

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

Simran Kaur: Hi, Dan. Hi, Elaine. This is Simran on for Adam. Thank you for taking the question. So I just kind of wanted to start off with AffloVest. It sounds like the headwind with the one DME is expected to linger into Q4 and at least part of the first half of 2024. Can you — this is a two-parter, can you quantify what percentage of the AffloVest business that this particular DME comprises, or are you able to give a growth rate for AffloVest in the quarter ex the one DME? And then two, how do we think about AffloVest longer term in terms of the potential growth trajectory? Is it still accretive tier 2025 financial target?

Daniel Reuvers: Yeah, so we haven’t broken out what the distributor was responsible for, but quite clearly, it’s a meaningful portion. The entire reduction for the full year is associated with that distributor. So, some of their base number came down, and then obviously the growth didn’t materialize. And that’s what really represented the reduction. As far as the future implications, yes, we do think that we’re probably going to have to lap May to get back into kind of the more predictable growth trajectory with them. In the meantime, we’re really pleased that the balance of the field, the rest of our DME customers have continued to grow. And we really don’t think it has any impact on our longer-term targets. We’re still very committed to those, and we don’t see any change in the underlying segment.

I mean, this is one I think that I’ve shared I’ve had an interest in for years in this segment of treating pulmonary patients. And we continue to believe that the TAM is every bit as large as it was. And I think, we’ve talked about 500,000 patients with bronchiectasis and more than 4 million that have gone undiagnosed and we continue to stay very focused on that and see it as a long-term growth contributor to the business.

Simran Kaur: Okay, very helpful. And then just for my follow-up here, I know you’re not providing formal guidance for 2024 today, but the businesses showed pretty impressive P&L leverage over the past couple of quarters. So just help us think about: A, how durable this metric is going forward? Should we expect to see pretty sustainable net income profitability just going forward from this quarter forward.

Elaine Birkemeyer: Hi, [Celine] (ph). Yes, we’re not providing 2024, but we are continuing to focus on the 2025 targets that we put out at the beginning of the year. Again, that was $350 million in revenue, $50 million of adjusted EBITDA, which would be a little bit over a 14% adjusted EBITDA margin. We still feel good about our path in achieving that. And I think the profitability we’re demonstrating this year is, I think, showing good progress in that direction.

Daniel Reuvers: Yes, and I would just add, too, I think, to Elaine’s point is, as it relates to the durability, particularly some of the growth that we’ve seen on the lymphedema side. I think this is reflective of a more stable environment that we’ve probably not been in since 2023 over the course of the last few years. We think the sales productivity gains that are contributing to some of this has some additional runway as we haven’t completed all of the demos that have not all shifted over to our trainers. So, we still see an opportunity to continue to expand that capacity with our sales team. And I think the strong reception we’re seeing to some of our new products, namely Entre Plus and hopefully more of the same with our ComfortEase garments, certainly point to some good continued sustainable growth as we look forward.

Simran Kaur: Great. Thank you.

Operator: And the next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.