Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q4 2023 Earnings Call Transcript

Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q4 2023 Earnings Call Transcript February 20, 2024

Tactile Systems Technology, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.13. TCMD 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 fourth quarter and 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 the 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 obligation to publicly update or revise our forward-looking statements as a result of the new information, future events or otherwise. This call will 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. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our 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.

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 fourth quarter and fiscal year earnings call. Let me provide a quick agenda for today’s call. I’ll start with an overview of our fourth quarter financial results and the primary factors that contributed to our performance, followed by a review of some of our recent operational highlights. Elaine will then cover our quarterly financial results in further detail and review our 2024 financial guidance, which we introduced in our earnings press release this morning. I’ll conclude by discussing our outlook and strategic priorities for 2024 before we open the call for questions. With that as a backdrop, let’s begin with an overview of our financial performance. We were pleased to demonstrate revenue growth in both lymphedema and airway clearance products, post record quarterly profit, and further strengthen our balance sheet by continuing to generate solid cash flow from operations and retiring our line of credit entirely.

In the fourth quarter, we generated revenue of $77.7 million, representing 5% growth on a year-over-year basis. Our fourth quarter performance enabled us to achieve our guidance for the fiscal year. Our year-over-year revenue growth was largely driven by performance of our lymphedema product line, which grew 6% year-over-year to $69.5 million. We were also pleased to see better than expected sales of our airway clearance products, which totaled $8.2 million in the fourth quarter, representing 16% on a quarter-over-quarter basis and 1% growth compared to prior year period, despite transient headwinds. We complemented our revenue performance with notable improvements in profitability, which exceeded our expectations for the fourth quarter. GAAP net income increased 77% year-over-year and adjusted EBITDA grew 27% year-over-year.

Our performance in the fourth quarter reflects our enduring commitment to enhancing our profitability profile. We also generated $18.4 million of cash flow from operations driven by our strong net income results and continued improvements in working capital. We paid off our $16.8 million line of credit during the fourth quarter as well as our final $5.6 million contingent consideration payment related to our acquisition of AffloVest, ending the quarter with $61 million in cash. All in all, we were pleased to close out 2023 with solid financial performance in the fourth quarter while further strengthening our balance sheet. Turning to a more detailed discussion of the drivers of our fourth quarter sales performance, the growth in our lymphedema product line was driven by the enhanced productivity of our field sales team, which continued to benefit from our initiatives to improve their operational efficiency and enhance our product offering.

Our continued efforts to reduce the time our reps devote to non-selling benefited from our patient trainers’ assistance. Most notably, our patient trainers conducted a larger share of in-home patient demos, a critical presales tasks which our sales team has traditionally been responsible for. Entering 2023, less than 10% of all in-home patient demos were conducted by our patient trainers. We reached roughly 30% by year end, providing our reps with additional time to engage with prescribers. We’re excited by the success of this initiative and we believe there’s an opportunity to make further progress on this front in 2024 as well. During the fourth quarter, we continued to see a favorable response to our new products. In particular, Entre Plus, our next-generation entre system has had a stronger than expected showing since its launch in March, and we continued to see impressive adoption of the system during the fourth quarter.

The user-centric enhancements made to the Entre Plus system continue to be warmly received by patients, including features like active garment deflation, it’s easy-to-use LCD controller, and it’s ability to treat two limbs simultaneously. We’ve also improved our teams’ level of focus on the largest segment of patients that qualify for basic pneumatic compression device. As a reminder, insurers like CMS require patients to initiate therapy with a device in this category, like our Entre Plus system, before they may ultimately become eligible for an advanced device like our Flexitouch Plus system. In keeping with our broader focus as an organization on developing relationships with patients earlier in their treatment paradigm, our team’s been working to ensure that a larger portion of these patients begin their active therapy with our Entre Plus system.

The introduction of this system combined with our enhanced focus on this portion of our addressable patient population was an important contributor to our performance in the quarter. Likewise, the launch of upper extremity ComfortEase garments during the third quarter provided our sales reps with an enhanced offering for patients with oncology-related lymphedema. Our ComfortEase upper extremity garments are used with Flexitouch and include improved therapeutic coverage of the axillary region, an important treatment area for those suffering from breast cancer-related lymphedema. They also allow for bilateral treatment of the upper extremities, enabling patients with lymphedema in both arms to complete their treatment in roughly half the time.

In the months following our launch, we’re seeing strong sales to patients with breast cancer-related lymphedema and we look forward to continuing to enhance our focus on this portion of our addressable patient population as well. We also finished the year with a field sales team of 254 supporting our lymphedema products, a small increase in sales people compared to 246 at the end of the third quarter. With respect to our airway clearance product line, while sales remain paced by one large DME that returned to pre-COVID criteria in May, we were heartened to see their ordering volume improved sequentially relative to the third quarter of 2023. We were also pleased to see continued growth in sales to our other DME customers. Together, these improvements enabled us to generate growth of 16% on a sequential quarterly basis and return to growth on a year-over-year basis as well.

As we’ve commented previously, the large affected DME customer experienced slower placements following the expiration of COVID-19 public health emergency, or PHE waiver in May of 2023. They’d taken advantage of the relaxed eligibility requirements under the PHE waiver, and the return to traditional pre-COVID eligibility requirements has continued to slow their volumes. While sales to this one large DME will likely remain paced by the impact of the PHE waiver expiration until its anniversary in May of 2024, we continue to expect strong, sustained growth longer term as we expand penetration of the large underserved bronchiectasis patient population. To that end, we made investments in our airway clearance sales team in the fourth quarter, expanding to 16 dedicated DME sales reps in order to enhance the level of support we provide our DME customers and their reps.

In addition to our commercial and financial progress during the fourth quarter, we continued our efforts to develop the markets we serve by supporting the education of clinicians and patients and investing in new clinical evidence. Our medical affairs team made strong progress throughout 2023. For the full year, we hosted nearly 100 educational events focused on lymphedema diagnosis, its co-morbidities, and its available treatments. Through this programming, we were able to reach over 7,200 clinicians, record outreach for Tactile Medical. Most recently, we hosted a number of targeted educational events focused on specific populations of patients, including those with breast cancer-related lymphedema, which we believe resonated with the clinicians managing their care.

On the airway clearance side of the business, we also initiated our first educational programming focused on bronchiectasis with three on-demand continuing education courses available on the knowledge center education portal of our website. These courses were developed by subject matter experts and accredited through the American Association of Respiratory Care, the California Board of Registered Nurses and Commission for Case Managers, enabling respiratory therapists, nurses and case managers to earn continuing education credits by completing them. Meanwhile, this past year our Kylee mobile application provided more than 22,000 users with direct access to educational resources, as well as tools to track their systems and monitor disease progression.

Finally, we continued to progress through the enrolment phase of our multi-center randomized controlled clinical trial evaluating Flexitouch for the treatment of lymphedema among head and neck cancer survivors. With 187 subjects enrolled in the trial at year end, this trial compares the effectiveness of the Flexitouch system to standard care practices over a six-month duration. Outcome measures include both physical improvements as well as bio-social quality of life results, and based on the recent pace of progress, we expect to complete enrolment by the end of the first quarter. Given the six-month patient follow-up period, we anticipate sharing the initial results near the end of the year. We look forward to sharing the results of this trial, the largest RCT ever conducted among head and neck lymphedema patients to influence payors, clinicians and patients.

Before I turn it over to Elaine, I’d like to share some additional thoughts on our performance in 2023 as a whole. Simply stated, our team achieved considerable progress this past year across multiple areas, strengthening our market leadership position, executing on our commercial strategy, and delivering strong financial performance including double-digit revenue growth and 62% growth in adjusted EBITDA this year. From a market leadership standpoint, we introduced multiple patient-centered design enhancements to optimize our product portfolio, including the first generational update to our Entre system since its original introduction. As I just mentioned, our education resources reached record levels of clinicians and patients, and we provided our lymphedema and airway clearance therapies to more than 77,000 patients suffering from chronic conditions that we address.

Through our efforts to driver operational efficiency by improving the productivity of our sales force, we delivered revenue growth of 14% in our lymphedema product line for the full fiscal year, our first year of double-digit growth in this product line since 2019. This enabled us to deliver significant sales and marketing leverage with just 1% growth in this expense line versus 2022. We generated record profitability for the year with $28.5 million of GAAP net income while improving our adjusted EBITDA margins by 340 basis points to 10.8%. From a cash flow perspective, our strong net income results combined with material improvements in our working capital performance enabled us to generate nearly $36 million of cash flow from operations. Along with the $35 million in net proceeds raised through our underwritten public offering of common stock last February, our financial condition has materially improved.

We ended 2023 with $61 million of cash while paying off the final $10.6 million earn-out payments associated with the AffloVest acquisition and reducing our outstanding debt by almost $20 million. I’m proud of our accomplishments across each of these areas, made possible by the efforts of our entire team at Tactile Medical which will leave us incrementally better positioned to drive profitable growth and strong cash generation going forward. Elaine will now review our fourth quarter financial results in more detail and discuss our 2024 guidance. Elaine?

Elaine Birkemeyer: Thanks Dan. Unless noted otherwise, all references to fourth quarter financial results are on a GAAP and year-over-year basis. Total revenue in the fourth quarter increased $3.8 million or 5.1% to $77.7 million. By product line, sales and rentals of lymphedema products, which include our Flexitouch and Entre systems, increased $3.7 million or 5.6% to $69.5 million, and sales of our airway clearance products, which include our AffloVest system, increased $52,000 or 0.6% to $8.2 million. Continuing down the P&L, gross margin was 72.1% of revenue compared to 70.5% in the fourth quarter of 2022. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 72.5% compared to 71.2% in the prior year.

The increase in non-GAAP gross margin was attributable to lower freight and manufacturing costs as well as improved product pricing. Fourth quarter operating expenses decreased $40,000 or 0.1% to $44.2 million. The change in GAAP operating expenses reflected a $1 million decrease in non-cash intangible asset amortization and earn-out expense, a $0.5 million decrease in sales and marketing expenses, and a $0.3 million decrease in research and development expenses. These items were largely offset by reimbursement general and administrative expenses, which increased $1.8 million. Operating income increased $4 million or 50.3% to $11.8 million. The improvement in operating income was driven by a $3.9 million or 7.5% increase in our gross profit, as well as the aforementioned $40,000 decrease in our operating expenses.

Non-GAAP operating income increased $3.2 million or 34% to $12.7 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 in the prior year period. We’ve provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other expense net decreased $0.9 million or 96.2% to $36,000. The decrease was primarily due to lower net interest expense. Income tax expense increased $1.3 million or 56.3% to $3.6 million. The year-over-year change in income tax expense was driven primarily by higher taxable income. Net income increased $3.6 million or 77% to $8.2 million, or $0.35 per diluted share, compared to $4.6 million or $0.23 per diluted share.

Non-GAAP net income increased $3 million or 52% to $8.9 million, compared to $5.9 million. Adjusted EBITDA increased $3.3 million to $15.4 million, or 19.8% of sales, compared to $12.1 million or 16.3% of sales. With respect to our balance sheet, we had $61 million in cash and cash equivalents and $29.3 million of outstanding borrowings at year end. This compares to $21.9 million in cash and $49 million of outstanding borrowings as of December 31, 2022. Turning to a review of our 2024 outlook, which we introduce in our earnings press release today, we 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. Our 2024 total revenue guidance range assumes that revenue in both our lymphedema and airway clearance product lines will also grow in a similar range of 9% to 11% year-over-year.

For modeling purposes for the full year 2024, we expect our GAAP gross margins to be approximately flat to prior year, our GAAP operating expenses to increase approximately 10% to 11%, interest expense of approximately $0.6 million, a tax rate of 30%, and a fully diluted weighted average share count of approximately 24 million shares. We also 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 $7.7 million, intangible amortization of approximately $3.8 million, and depreciation expense of approximately $3 million. Lastly, in the first quarter of 2024, we expect our total revenue to increase in the range of flat to up low single digits year-over-year.

With that, I’ll turn the call back to Dan for some closing remarks. Dan?

Daniel Reuvers: Thanks Elaine. As Elaine mentioned, our guidance reflects growth in both our lymphedema and airway clearance product lines for the full year. It also assumes that more of our full year growth will be driven by our performance in the second half of the year as prior year comparisons ease and we realize the benefits of our 2024 strategic initiatives, which I’ll walk through now. As we look to 2024, we’re focused on delivering another balanced year of double-digit revenue growth coupled with continued improvements in operating profitability by executing the following three strategic priorities. First, we remain focused on driving growth in both our therapy segments. This will include adding sales reps to both our lymphedema and respiratory teams in the first half of 2024.

We also plan to contribute to ongoing gains in sales rep productivity by expanding in-home demo support among our patient trainers. As I mentioned earlier, with roughly 30% of in-home patient demos conducted by our patient trainers at the end of 2023, we see more opportunity to build on the success of this initiative in 2024, freeing up even more time for our lymphedema sales reps to engage with prescribing clinicians. We expect to continue our increased level of focus on entry-level pump placements with our improved Entre Plus system. Knowing that so many patients enter the therapeutic funnel with an entry-level pump, either due to initial symptoms or payor requirements, we plan to compete vigorously to provide whatever therapy the patient qualifies for.

For the AffloVest front, we intend to not only expand our sales specialist headcount but to work on on-boarding additional DMEs, showing them that AffloVest is becoming a valuable part of the respiratory DME arsenal and a new offering for them to compete with. Second, 2024 will be a year of investment in tech-related tools throughout our business. We’ll be streamlining various back office processes, applying AI to interpret incoming orders and direct them with less manual processing, as well as a more efficient electronic method of verifying patient benefits. We’re evaluating more efficient collection and exchange of prescriptions and medical records with a more frictionless electronic medical record system targeted for deployment in the second half of 2024, and we’re planning to introduce new customer relationship management tools later in 2024 as another way to further enhance sales force productivity.

These are important investments designed to improve our efficiency, reduce operating expense, and leverage the best of technology. Third, we’ll continue to focus on improving the customer experience. That will include the introduction of a next-generation lymphedema therapy platform by the end of the year, as well as advancing a next-generation AffloVest system targeted for 2025. New generations of our therapeutic systems will focus on consumer-friendly attributes as we recognize patients depend on our therapies daily, and thus our therapies become an important expression of their lifestyle. We’ll also focus on connectivity, ensuring that patients get the education and feedback they need to manage their conditions effectively. As I mentioned earlier, we also recognized the healthcare practitioner as a key customer, as much as the patient, and with this in mind, some of our tech investments are designed to make their role in helping patients obtain treatment as unobtrusively to their practice as possible.

These are the moves that you should expect of a market leader. With increasing sales productivity, an enhanced portfolio of products and solutions, and strong customer relationships, we look forward to building on our success from 2023. Before concluding my remarks today, I’d like to thank our employees for their tremendous efforts this past year, which made our collective progress possible. Thanks as well to our customers and investors for their continued support. Operator, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator instructions] Our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Adam Maeder: Hi, good morning Dan and Elaine. Thank you for taking the questions. Congrats on a solid Q4 and great to see the leverage in the quarter. I wanted to ask about the guidance construction on the top line for 2024, the $300 million to $305 million – I think that’s 9% to 11% growth. Can you just help us understand how you framed the expectations for growth for both lymphedema and AffloVest? I think I heard they’re expected to both kind of grow around that range, but wanted to confirm that and then also just, I guess, understand what’s contemplated for those segments and how you arrived at those figures, and then I have a follow-up. Thanks.

Daniel Reuvers: Sure Adam, thanks for the questions. Let me start with a little bit of color on the growth drivers for 2024, and then maybe I’ll ask Elaine to weigh in on some of the additional assumptions. I think if we look back, certainly at 2023 just for context, I think we recognized and were able to demonstrate where growth can come from. Really, three key areas in our recent past in our performance was attributed in the past to adding heads, and we know that the heads we added in ’22 became productive in ’23 and contributed pretty meaningfully. Tech support that we’ve continued to expand to liberate the sales force has led to more productivity – we saw about 14% improvement last year with a relatively flat headcount, almost $100,000 of additional productivity per head, and then a simpler Rx process.

Remember at the beginning of last year, we introduced the elimination of the CMN courtesy of Medicare and an easier form, and all of those things we talked about were nice contributors, so as we look into 2024, increasing headcount in the first half is part of the playbook again. We added just a few in December, but we expect to add some additional heads in the first half of this year, and that should be a growth driver as we get into the back half. This whole productivity piece, we think that probably half of the growth that we’ll be able to deliver this year can come from some continued expansion in productivity. The fact that we have about 30% of the in-home demos done now by someone other than the sales force certainly proved productive last year, and we think that there’s more runway to expand as we enter into the second half.

Then the whole HCP experience is a really important one that we’ve recognized can influence prescriber behavior. The easier we can make it for them, the more we’ll be their therapy of choice, and I think that patients that need therapy don’t get overlooked when it’s an easier, less obtrusive process, so we’re going to continue to invest in some electronic tools that will make it a much more easy process for HCPs to submit those orders. I think on the AffloVest side, we’ve talked a little bit about the fact that we have to lap that May event with the one DME, but we’re going to invest in more sales people there as well. We added a few in the fourth quarter and we’ll add some additional heads in the first half of the year, and then continuing to focus on expanding branch participation not only among the DMEs we already work with but piloting some new DMEs, and I think all of those things should certainly be contributors as we look into the balance of 2024 as well.

I don’t know if, Elaine, you’ve got a couple of comments on some of the other assumptions?

Elaine Birkemeyer: Yes, I think maybe the only thing I would add is the adjusted EBITDA guidance we’ve provided does suggest a small improvement in EBITDA margin. We will continue looking at driving productivity, getting operating expense leverage; but as Dan mentioned, we are making investments this year in headcount growth as well as technology, so we don’t expect large improvements but we do expect a modest one. Then secondly, we are going to continue to focus on increasing our free cash flow. We made great strides last year – you know, close to $33 million of free cash flow improvement. We will continue to look at driving free cash flow both from our profitability as well as continued improvements in working capital. I will say the working capital improvements won’t be to the same extent as last year, but we do still think there’s runway to continue to work on improving our collections, which fueled a lot of the growth last year.

Adam Maeder: That’s great color, appreciate the fulsome response there. Elaine, I think you just ticked the box on my second question on the leverage piece, but maybe I’ll stick with the financials. I guess I wanted to ask about the LRP that you’d previously outlined – I think on the top line, it’s $350 million-plus in 2025 of revenue. Just wondering if–and I think that would imply kind of an acceleration to growth in ’25 over ’24, so what can you tell us about how we should think about the LRP? Does that still stand firm, and are you comfortable with the acceleration in growth that’s kind of implied for ’25? Thanks for taking the questions.

Daniel Reuvers: Yes, let me take a shot at that one, Adam. First of all, our ’25 targets are still good targets, we believe. I think that staying focused on revenue, profitability expansion, free cash flow, those are still very much in sight. I think we’ve certainly made good progress in 2023 against those – I mean, if you reflect on the first of this three-year window that we laid out, our lymphedema growth of 14% in 2023 was actually a little ahead of our expectations. The $33 million of cash flow as ahead of our expectations, and then as we know, we kind of lost a year on AffloVest, so some puts and takes happened in 2023. Plenty of work left to do, but I think we still expect that when we exit 2024, one of the reasons growth isn’t always perfectly linear, we think that we’re really going to be nicely positioned for some addition inflection points.