Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q4 2023 Earnings Call Transcript

Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q4 2023 Earnings Call Transcript February 21, 2024

Tandem Diabetes Care, Inc. misses on earnings expectations. Reported EPS is $-0.27 EPS, expectations were $-0.23. Tandem Diabetes Care, 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: Thank you for standing by, and welcome to Tandem Diabetes Care’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to EVP and Chief Administrative Officer, Susan Morrison. Please go ahead.

Susan Morrison: Hello, everyone and thanks for joining Tandem’s 2023 fourth quarter and year end earnings call. As a reminder, today’s discussion will include forward-looking statements. These statements reflect management’s expectations about future events, product development time lines and financial performance and operating plans and speak only as of today’s date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings.

We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. Today’s discussion will also include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non-GAAP information presented should not be considered as a substitution independently or superior to results prepared in accordance with GAAP. Please refer to our earnings release, quarterly report on Form 10-K and the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

Leading today’s call is John Sheridan, Tandem’s President and CEO, who will be joined by Leigh Vosseller, our Executive Vice President and Chief Financial Officer. I’ll now turn the call over to John.

John Sheridan: Thanks, Susan. We appreciate everyone joining us today. Looking back on 2023, we exited the year on a high note, demonstrating positive momentum across key areas of our business. In many ways, our efforts in 2023 focused on building and preparing for the future as we executed on multiple strategic initiatives. Most notably is the unprecedented accomplishment of being in various stages of launching 4 new products in the United States. These include two CGM integrations, along with the introduction of Tandem Source, our next-generation data management platform, and the milestone of adding Tandem Mobi, our new pump platform to our portfolio. Other strategic initiatives we completed include the onboarding of our European distribution center and driving operational cost savings across all products and processes through lean activities and other manufacturing efficiencies.

We’ve also been evolving our organization as we’ve expanded our leadership by attracting key talent with global experience to complement the team and help us prepare for the future. Lastly, we made meaningful advancement in progressing our channel strategy in the development and in the development activities of our longer-term portfolio. The team has been executing particularly well on our strategy to provide people with insulin-dependent diabetes and their care teams flexibility and choice in insulin delivery. These achievements were made possible thanks to the hard work and perseverance of our employees. Thank you, everyone, for your continued dedication and efforts to contribute to building our business and executing our vision to improve the lives of people with diabetes.

Evidence of this vision was highlighted in recent months, as we are now the only pump company to offer users choice in CGM integration in the U.S., having launched the t:slim X2 with both DexCom’s G7 and Abbott FreeStyle Libre 2 Plus sensors. The diabetes community has been enthusiastic in their response to having choice in their therapy management. Thank you again to our CGM partners for your collaboration. We are proud to be a leader in sensor integration and being the first insulin pump company to offer compatibility with your incredible newest technologies. In addition to CGM integration, just last week, we achieved the defining milestone of launching Tandem Mobi. We are now offering people choice in insulin pump platforms so they can decide how they want to wear and operate this device while getting the benefits of our #1 rated Control-IQ technology.

The response from internal and external people who participated in the early access program, as well as our health care providers, has been emotional and inspiring. Participants say that Mobi exceeded our expectations, sharing sentiments that it is freeing and liberating. An external former MDI user put it very well, saying that Mobi gave my brain time to process real world and not just how I manage my diabetes. It’s this kind of feedback that underscores our progress in furthering our mission to improve the lives of people with diabetes through relentless innovation and revolutionary customer experience. Operational and commercial readiness for the Tandem Mobi launch was the primary focus for us in the fourth quarter. We are well equipped to continue scaling this exciting new technology, first with the DexCom G6 integration, which is now available, followed by DexCom G7 integration later in the second quarter and then integration with the FreeStyle Libre 3 technology.

Another highlight that continues to stand out in the fourth quarter is that Tandem customers are highly satisfied. We see this reflected in both independent and our own customer surveys and our continued high renewal rate. With Tandem technology, people are able to wake up happy by sleeping well through the night and thinking less about their diabetes. It’s from their experience with our company and our AID solutions which consistently demonstrate improved clinical outcomes. It was an honor to have the data from Control-IQ trials cited in recently updated American Diabetes Association standards of care to support their guidance that AID systems are preferred over non-automated pumps and multiple daily injection and should be offered for diabetes management to youth and adults with Type 1 diabetes.

We’re continuing our commitment to AID advancement, which we delivered on in the fourth quarter with our receipt of FDA clearance to lower the age indication for Control-IQ and expand its feature set with options for greater personalization. We’re proud to offer the number one rated automated insulin delivery system by patients and health care providers, and we’ll continue to innovate with new indications and features. As we’ve seen across the industry in the past 5 years, innovation drives technology adoption. That’s a competitive market, yet remains large and underpenetrated. Approximately half of our new customers have converted from multiple daily injections, and the remainder from competitive conversions. With the launch of our new products this year, we are focused on increasing pump adoption, bringing the benefits of our technology to more people living with diabetes.

As we expand the pump market, we expect to see new customers for multiple daily injections begin to outpace growth and competitive conversions. Turning to our performance outside the United States. 2023 was a year of transition for us. It included a number of unique onetime events that pressured our sales, such as the transition to our European distribution center to improve supply chain efficiency and then the more recent change in the French reimbursement structure. With these events now behind us, our focus is returning to a meaningful growth rate. We’ve welcomed new commercial and international leadership with global diabetes experience who are furthering our strategy to bring the benefits of our technology to more people worldwide. The geographies we serve are increasingly competitive, but we have a strong offering today with our number one rated t:slim X2 with Control-IQ and a significant opportunity as the markets we’re in internationally are typically less than 20% penetrated.

We are also focused on bringing our technology offerings outside the United States closer to parity with our U.S. portfolio. This began last month with our scaled international rollout of DexCom’s G7 integration only 1 month following it’s broad U.S. availability. Other innovations we plan to begin offering internationally this year and include the deployment of our Tandem Source data management application, the launch of our mobile application for the t:slim X2, which features the ability to deliver bolus from a phone along with valuable data insights, and the t:slim X2 integration with the Abbott FreeStyle Libre 3 sensor. We’re also taking steps to offer Mobi outside the United States, which includes regulatory work and localization.

In addition, we are working to advance our portfolio of future products, which center around our 3 pump platforms, t:slim, Mobi and Sigi, each of which are designed to appeal to different segments of people living with diabetes. For our t:slim and Mobi systems available today, we are working on exciting features such as the extended wear infusion set and a tubeless wear option for Mobi. For Sigi, we’re in active development of an ergonomic patch pump that features the use of pre-filled insulin cartridges. And like all our pumps, it’s rechargeable, as it’s part of our commitment to sustainability. We have a number of clinical studies underway, and plan for this year in support of these development initiatives. We will also be advancing our automated insulin delivery algorithm and expanding its indications to include people living with Type 2 diabetes.

As we look ahead, 2024 is positioned to be a year of tremendous opportunity for Tandem. The strengths that drove meaningful growth in the past are once again in place today. These include having a differentiated portfolio of technology solutions, our highly weighted customer service, our number one rated automated insulin delivery algorithm and our international opportunity. I’d now like to turn the call over to Leigh, so she can share more details on the fourth quarter results and our financial expectations for 2024. Leigh?

Leigh Vosseller: Thanks, John. As a reminder, unless otherwise noted, the financial metrics I’ll be discussing today are on a non-GAAP basis. Reconciliations from GAAP to non-GAAP results can be found in today’s earnings release as well as on the Investor Center portion of our website. We ended 2023 with more than 450,000 customers receiving the benefits of the t:slim X2 worldwide, which is 7% growth over the prior year. Our fourth quarter sales exceeded our baseline expectations at $209 million, bringing the full year to $773 million in worldwide sales. Starting with the U.S. market. This was the highest shipment quarter of the year at 21,000 pumps, including our highest ever quarter of renewal pumps. Standard seasonal trends were evident with 24% growth in pump shipments over the third quarter.

The ability to buy X2 and switch later to Mobi through Tandem Choice was an appealing opportunity for many. As expected, there were customers who decided to wait to purchase their pump once Mobi became available. Renewals continue to meet historically high capture rates, demonstrating strong customer satisfaction and retention. After our customers whose warranties expired in 2023 have already purchased a new t:slim X2 pump. We also continue to see high rates of people whose warranty expired in prior years purchase a new t:slim pump, and as a result, our total renewal shipments year-over-year grew by more than 50%. U.S. sales in the fourth quarter were $163 million, and sales reached $580 million for the full year. Sales in both periods were once again fueled by supplied and installed base growth, with about half of the sales for the year coming from supplies.

We are now serving more than 310,000 people in the U.S., an increase of 7% compared to the end of 2022. Dynamics were similar outside the U.S., with supply sales being a meaningful contributor in the year. Our in-warranty installed base has now reached approximately 140,000 people, growing 8% over 2022. Adoption of our technology outside the U.S. has been remarkable over the past 5 years, as our installed base has grown to levels that took us more than 8 years to achieve in the U.S. Supply sales to support this base grew 35% year-over-year in the fourth quarter. This was due in large part to variability in ordering patterns in the prior year before the distribution center was fully operational across all European markets. Fourth quarter sales outside the United States were $46 million on 6,000 pump shipments.

As anticipated, these results reflect 2 onetime events. The first was from a distributor in a larger market shifting their pump order into 2024 as they managed inventory levels in anticipation of t:slim’s integration with the G7 sensor, which began rolling out internationally in January. The second onetime impact was an $8 million sales reduction related to the implementation of a new rebate structure in France associated with our existing installed base. Excluding the impact of that rebate, sales in the fourth quarter has been more in line with recent quarterly levels. We do not anticipate the rebate will have a material effect on o-U.S. sales going forward. Full year 2023 sales outside the United States were $193 million, reflecting both the $8 million rebate reduction in the fourth quarter along with a $20 million headwind in the first half of the year due to our European distribution center transition.

These unique events were disruptive to our near-term results, but allowed us to lay the foundation for opportunities to grow this business more efficiently and meaningfully going forward. Turning to margin performance. Our 2023 gross margin was 51% compared to 52% in 2022. We saw improvement year-over-year in underlying key fundamentals, including higher average selling prices and lower manufacturing costs for pumps and cartridges. These benefits were offset by unfavorable product mix, with pumps representing just under half of our worldwide sales in 2023, as well as geography mix and the impact of the rebate pricing adjustment in France in the fourth quarter. The rebate adjustment was most impactful to our fourth quarter margin results. Gross margin was 51% in the fourth quarter, pressured 2 percentage points by the rebate, and our adjusted EBITDA margin was 2% of sales, which was pressured by 4 points.

Despite this adjustment, we maintained positive adjusted EBITDA for the third quarter in a row as we continue to focus on operating efficiencies across the business to fund investments to support our R&D projects and new product launches. For the full year of 2023, our adjusted EBITDA margin was slightly negative at 1% of sales. Turning to cash. We funded several key initiatives in 2023, including $69 million for acquisitions, $25 million for strategic investments and $27 million for capital expenditures primarily associated with increased manufacturing capacity for new products and build out of our headquarters as part of our facilities consolidation efforts. We remain thoughtful about how and when to address the $288 million in convertible notes which will become a current liability in the second quarter.

Our balance sheet remains strong with $468 million in total cash and investment. Looking ahead, we are excited for the opportunities that our new product launches offer in 2024 with a return to sales growth. Our non-GAAP sales guidance is approximately $850 million in 2024 or 10% sales growth, with the majority of sales coming from recurring revenue streams. This does not assume any inflection or acceleration in sales and does not reflect our bullish enthusiasm for new offerings. We will continue to gather and assess data related to new product adoption to inform updates to our guidance in upcoming quarters. U.S. non-GAAP sales are expected to be $625 million or growth of 8%. This contemplates a competitive environment consistent with 2023, with growth largely based on our more predictable supply and renewal sales with a growing renewal opportunity.

Looking back to pump shipments 4 years ago, the number of warranties expiring in 2024 alone grows by more than 30% to approximately 70,000. We have historically renewed approximately half of new renewal opportunities within the same calendar year. Both pumps and supply shipments are typically impacted by seasonal patterns across the quarters associated with insurance dynamics in the U.S. For example, first quarter pump shipments typically decline from the fourth quarter by approximately 30%. This step down may be more pronounced in the first quarter of 2024 due to the mid-quarter launch of Mobi and Mobi integration with G7 planned for the second quarter. The back half of the year typically benefits from seasonality, particularly in the fourth quarter, which for the past few years has represented nearly 30% of our U.S. sales for the year.

Our multichannel managed care strategy continues to advance in an exciting way, and we anticipate signing contracts in 2024 to begin serving Mobi customers through the pharmacy channel. U.S. sales guidance does not reflect any benefit from access to the pharmacy channel. We will update you on our progress on the expected longer-term benefit in future quarters. With that in mind, we are providing you additional direction on Q1 2024 for the first time, where we anticipate U.S. sales in the first quarter to be approximately $122 million. The remainder of the year is expected to follow historical seasonal patterns where both pump and supply sales scale up across the year. Sales outside the U.S. for 2024 are expected to grow 17% to $225 million, taking into consideration an increasingly competitive environment.

This also assumes a return to pump average selling prices of approximately $2,300, which is more similar to what we experienced in years prior to 2023 and contemplates the impact of the new French rebate structure. First quarter sales are expected to be approximately $53 million or an outsized growth rate of nearly 40% due to an easier comparison to the sales disruption in the first quarter of 2023 from the start of our European distribution center operations. Margins in 2024 are expected to be in line with 2023, with gross margin at approximately 51% of sales and adjusted EBITDA breaking even. While we expect to continue driving efficiencies across the business to fund the new product launches and future leverage, the launch of Mobi will initially create incremental pressure.

The first quarter, in particular, will see the greatest impact, where we expect gross margin of approximately 48% and adjusted EBITDA of negative 15%. As pump sales grow and Mobi volumes increase across the year, both margins are anticipated to improve, with adjusted EBITDA margins returning to positive in the second half of 2024 and free cash flows to follow accordingly. After volume scale, we anticipate Mobi will be the greatest contributor to our longer-term gross margin target of 65%. To summarize our 2024 outlook, worldwide non-GAAP sales are estimated to be approximately $850 million, including sales outside the United States of $225 million. Our gross margin expectation is approximately 51%, and adjusted EBITDA is estimated to be breakeven.

Our non-cash P&L charges for stock compensation, depreciation and amortization are expected to be approximately $120 million, of which $100 million is associated with stock comp and $20 million with depreciation. We are also providing first quarter guidance with worldwide sales of approximately $175 million, gross margin of 48% and adjusted EBITDA of negative 15%. I will now turn the call back to John.

John Sheridan: Thanks, Leigh. As you can see, it was a busy close to 2023 and an exciting start for 2024. Thanks to the unwavering commitment to our teams, we are now in the home stretch of completing the rollout of four new products, making significant progress on the next phase of our pipeline and maintaining the highest levels of customer service while generating operational efficiencies. The opportunity for Tandem Diabetes Care remains meaningful, and I look forward to providing you updates throughout the year as our company continues to progress. We will now open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Steve Lichtman of Oppenheimer & Company. Please go ahead, Steve.

Steve Lichtman: Thank you. Hi, guys. Congratulations on the progress, including the recent launches. So I guess my question – I know it’s very early, but what are you hearing from the field in terms of where new interests lie as it relates to Mobi versus t:slim? Are you expecting Mobi sales should really lead the way here over the next few quarters? Do you expect it to be pretty balanced? What’s sort of the initial read you’re getting from the field?

John Sheridan: Hi, Steve, how are you doing? Well, first of all, I’ll say the response has really been incredibly positive from early access participants and ATPs. A lot of ATPs are actually using it, and it’s certainly exceeding our expectations. I mean, it’s tiny. It’s very light with an adhesive sleeve. It’s expanding wearability options, and the cellphone control provides very discrete interactions with the system. People actually forget that they have it on and the common sentiment we’re hearing is it’s liberating and it provides freedom from the burden of diabetes. I think Mobi is going to change the narrative from tube to tubeless to wearability and choice with the number one rated AID system. And our sales force is highly motivated.

There is been HCP events that have been occurring over the last several weeks. They are very well attended. And I think that the response and feedback has been very positive. So I think it’s going to – I think there is certainly going to be people out there that are interested in t:slim, and t:slim will continue to be a meaningful part of our revenue. But I think Mobi is going to begin to accelerate as we get into the second quarter and the G7 integration is made possible in the late spring. And I think that it will continue to progress throughout the year.

Steve Lichtman: Got it. Great. And then just as a follow-up to that, I know you’ve said that Mobi kind of allows you the first steps into the pharmacy. I know you mentioned that. Can you talk a little bit more about sort of the next steps there and maybe a little more detail on what you mentioned in the prepared remarks?

Leigh Vosseller: Sure. Thanks, Steve. So when it comes to pharmacy, you’re correct, Mobi is our introductory product into that channel, and it’s proving itself as we’re having active conversations these days with different payers and PBMs. And so we feel very confident that we will be signing a contract this year. We don’t, right now, have anything factored in, in terms of – from a material perspective in 2024. But as we progress, we will certainly give more information on that.

Steve Lichtman: Great. Thank you.

John Sheridan: Thanks, Steve.

Operator: Thank you. Our next question comes from the line of Matt Miksic of Barclays. Please go ahead, Matt.

Matt Miksic: Hi, thanks so much for taking the question. And congrats on the upside here in Q4 to your estimates, to our estimates and projections. So great finish. It’s been – for a lot of folks, kind of a bumpy year of preparation for the future, as you talked about, John. So one question on – some of the comments you made around renewals, strong renewal year, and some of those folks seemed like they were kind of out of warranty for a period of time and renewing. And I’m wondering if you have any data points you picked up from these folks through your – your channels or surveys or anything that would indicate like where have some of these folks been? What has kind of caused people to come back to t:slim or to Mobi? And then I have one follow-up.

Leigh Vosseller: Sure. So thanks for the question. So renewals is one of the best, brightest spots that we’ve seen in 2023. As you mentioned, it has been quite a challenging year. But even with that, we have been capturing our renewals at peak rates compared to even with 2022 and what we’ve seen in our history. And I think it says a lot about when there are a number of new products on the market, Tandem customers are sticking with Tandem and choosing our products once again. So for the people that have been sitting out there for a while, I mean, these are folks who are just content to use their product out of warranty. And as they are thinking ahead to what comes next, they are being motivated by some of the new opportunities that are being offered.

For instance, the G7 integration, the Mobi switching opportunity. And so I think that’s what’s driving people forward who have been out there. But we’ve been very successful with people whose warranties were newly expired as well. In fact, everyone in 2023 whose warranties expired, we have already renewed 50% of them. And so I think that’s great progress for us.

John Sheridan: And I’d also say that we’ve said our goal is 70%. And I think that if you look back over the last couple of years, we are absolutely achieving 70%.

Matt Miksic: Great. Well, congrats on that, the follow-up. I was curious, John, you mentioned – some of the things that you’re doing to kind of expand the utility of your recently launched product, Mobi and t:slim and G7 integration and so on, but then also mentioned Sigi. And I was wondering if you could walk through maybe just an update on the time line for things like the tubeless option for Mobi, the 7-day infusion set and maybe Sigi, just to kind of level set us for what to expect and when. Thanks.

John Sheridan: Yes. Sure. Well, we’ve talked about a portfolio of products and that being essential to address the many segments that exist within diabetes today. And our platforms are clearly t:slim, Mobi and Sigi. And we’ve talked about basically a technology upgrade to t:slim to t:slim X3. That’s underway. And then we’re also working with the team in Switzerland to develop a rechargeable pump that uses prefilled cartridges and has a very ergonomic form factor, a patch pump. So those are additions to the platform. In addition to that, we’re working on a tubeless option for Mobi. It’s the exact same pump. It’s just a new cartridge. And it’s a sled that has an infusion site on it. So that’s obviously underway as well.

And we’re working on an extended wear infusion set. In addition to that, we’ve got a great deal of work going on to future enhancements to Control-IQ. So honestly, I think we have the most exciting pipeline in the business. I think that we have – we have a lot going on. I think that our teams are making great progress, and we’re very pleased with the performance. But I think we’ve chosen to basically just – not – would pause on given specific updates on these products from a timing point of view until we actually get closer to the commercial launch. And so that’s what I think you’re going to hear from us in the next couple of quarters. And as we do get closer, which we expect to, we will be more specific in the future.

Matt Miksic: Okay, understood. Thanks so much.

John Sheridan: Yes.

Operator: Thank you. Our next question comes from the line of Matthew O’Brien of Piper Sandler.

Unidentified Analyst: This is Phil on for Matt. Thanks for taking our questions. I guess just starting on guidance, specifically for Q1. By our math, it looks like about 15,000 pumps here in the United States. How many of those are renewals? How many of those do you expect to be new pumpers? And I would assume that this is the case, but is this your expectation for the last big quarter of pausing ahead of Mobi’s commercial launch?

Leigh Vosseller: It’s great question. Thanks. So as we think about the Mobi trajectory, to your point, Mobi just became commercially available in the middle of the first quarter. It will become available with G7 in late spring. So we do still have a bit of this dynamic of there may be people waiting for the right feature that’s appropriate for them. And so the guidance in Q1 reflects that for certain that there might be people pushing to a future quarter, but the interest is still there. And so we’re really excited about that opportunity. In terms of renewal versus new shipments, we’re not breaking out that piece of information. But if you want to look back to what the opportunities were, you could refer back to the first quarter of 2020 as a reference point for what new opportunities become available. But again, the timing of Mobi availability with the appropriate features might still affect when people make that next purchase.

Unidentified Analyst: Thanks. And just as a quick follow-up. I guess just given all the pausing that we’ve seen in the market, do you expect a snapback? I know you just said people might continue waiting for a specific feature. But outside of typical seasonality, is your current guidance baking in like an outsized Q3, Q4? What are your thoughts on cadence throughout the year?

Leigh Vosseller: Sure. So the way we built the guidance for the year, keeping in mind that we do not foresaw have any inflection for the new products that are coming to market. So you can think about it as somewhat standard seasonality, maybe a little more depressed in the first quarter. I wouldn’t like to use the word depressed, but a little more pressured right now because of that Mobi timing. And really thinking back to how the renewal is scale. They are one of the largest pieces that are underpinning what our guidance is for this year, on top of supplies. And so the way the renewal scaled 4 years ago, 35% of those don’t become available until the fourth quarter themselves. And so I would say the scale is more about when renewals become available. And then as we get more information on the trends for the new products, we will certainly give updates to that in future quarters.

Unidentified Analyst: Makes sense. Thanks so much.

Operator: Thank you. Our next question comes from the line of Brooks O’Neil of Lake Street Capital Markets. Please go ahead, Brooks.

Brooks O’Neil: Thank you very much. Good afternoon. I have a couple of questions. I think the integration with Libre is one of the more exciting and interesting opportunities you have this year. Is it too early to say whether you think there could be a tailwind behind new pump purchases for you guys? Or what are you seeing from the response so far?

John Sheridan: Well, I mean – first of all, hi, Brooks. How are you doing? We have had a great deal of interest and excitement about the FreeStyle Libre 2 and G7 integration. And as you know, we have the only system in the market today that offers choice and sensor integration. And all the units that we’re shipping today have the latest software that enables G6, G7 and FreeStyle Libre 2 implementation. So everything that’s being shipped since the early part of January is that way. And then we’ve also had a significant number in the tens of thousands of pumps that have been updated using the remote software update process. So we are excited about it. We agree. We think it’s going to be a meaningful part of our longer-term growth. And – but we specifically don’t plan to talk about pump volumes relative to the sensor integrations at this point in time. But we think it’s going to be meaningful going forward.

Brooks O’Neil: Sure. So the second question I had was, obviously, this French rebate program is something new. I was hoping perhaps Leigh could just give us a little bit more detail about what that program looks like, what’s driving that and whether you think it’s something other countries in the international sphere or the EU might adopt as well?

Leigh Vosseller: Sure. I’ll do the last part of your question first. It’s very unique to France. It’s common for them to use a rebate structure, first time for us. So we haven’t seen this in other markets. So today, we feel like it’s contained there. The biggest, most material impact we expect to see would be what we just reported in the fourth quarter. And this is from the implementation, I would say, of it. And so if you think about it, this is a rebate liability that’s associated with the installed base we’ve already amassed in France. So as we look ahead, it will just blend into our normal ASPs as we ship new pumps and recognize that obligation alongside it. And so I hope that we’re not talking about it in the future. I think the good news is that Control-IQ as an advanced algorithm has been differentiated from a reimbursement perspective, and we look forward to driving the business in France and all of our markets outside the U.S.

Brooks O’Neil: Okay, thank you, Leigh.

Leigh Vosseller: Sure, thanks, Brooks.

Operator: Thank you. Our next question comes from the line of Chris Pasquale of Nephron Research. Your questions please, Chris.

Chris Pasquale: Thanks. John, the competitive landscape has evolved quite a bit over the past year, but your mix of MDI conversions versus competitive switches has stayed pretty consistent quarter-to-quarter. Curious how you’re feeling about the competitive headwinds you’re facing today? And do you feel like you kind of have the stage to yourself here with the Mobi launch to really make the kind of impact that you’d like have some of those other launches kind of gone through their initial hype cycle to clear the field for you a little bit?

John Sheridan: Yes. Thanks, Chris. Well, certainly, we think that the diabetes market is large and under-penetrated. And so there is a lot of opportunity both in the U.S. and outside the U.S. I would say that when you look at the last year or so, it’s – we’ve it’s the competitive pressures that we saw in the U.S. were pretty much in line with expectations. There was definitely pressure, but they stabilized probably early in the 2023 time frame. And there is a number of new entrants, and they are going to come and go. But I would say that the primary competitors we have are the two big ones. And I think you know who they are. Outside the United States, the environment is becoming increasingly more competitive. And we’ve been hearing this from our distributors.

It started happening roughly in the second half of last year. And there is been one patch enter that was the U.S. that’s come into the market with a new device, and there is also been a smaller OUS competitor that has generated some noise and made some progress. So I think that you’re exactly right, though. I think we are focused on our new products, and we think these new products position us to take advantage of these larger markets. This is really the first time we will have had a significant new product opportunity in the last 18 months. And I think that when you look at our competitors, both of them have brought new products to market. So I think we’re very focused on getting these devices to market. We’ve got a – we’ve got new sales leadership.

We’ve got a very energized sales team. And I think both in the U.S. and OUS markets, we think that these products are going to make a big difference to turn things around for us.

Chris Pasquale: Thanks. And then would just love an update on the Type 2 opportunity, how you’re thinking about that for both of the products and time lines there.

John Sheridan: Yes. We’re actively engaged in the clinical study. We’re enrolling patients, making good progress there. I think from a timing point of view, the study is probably going to get done sometime in the mid to latter half of this year, a filing. And I would say that roughly rough time frame, we’d probably see the product in the market sometime in 2025. I think that we believe that Mobi, with advanced sensor integrations and a Type 2 indication, is going to be a very appealing product to the Type 2 community. And we’ve got – we’ve got a lot of focus on developing the business case, the commercial strategy, the launch strategy, the product strategy for Type 2 underway as we speak.

Chris Pasquale: Great. Thank you.

John Sheridan: Yes.

Operator: Thank you. Our next question comes from the line of Travis Steed of Bank of America. Please go ahead, Travis.

Travis Steed: Hey, thanks for taking question. I wanted to ask about Q1, specifically on the Q1 shipments. Just kind of what you’re seeing in January and February, why you’re starting off the Q1 revenue guide where you are? And on the margins down 15% in Q1, just trying to get comfort with the margin ramp over the course of the year. Looking at last year’s ramp starting the year at 11.5% margin, getting to negative 1 or almost breakeven for ‘23. So ‘24 margins, a bit steeper on that ramp. So I just wanted to kind of get some clarity on your conviction and the margin ramp over the course of the year. And when does Mobi actually become accretive to margins? Is that something that happens in ‘24?

Leigh Vosseller: Yes. Great question, Travis. So Mobi is a big – it has a big impact on the margin profile this year. So if you look at any year, it’s not as steep of a tilt. It usually does follow comp sales across the year with the lowest in the first quarter improving across – through the fourth quarter. With the way the Mobi’s scaling, we anticipate it will be a little more pressured upfront and also not just with the COGS associated with the lower volumes that we’re producing, but the spending in order to effectively carry out that launch. And so across the year, we expect that as we’re building at higher volumes, we will start to see more and more benefit. And by the time we’re exiting the year. Mobi will actually start to be making a contribution to margins.

So really, it’s a 2025 story in terms of seeing a real difference, and we still firmly believe it’s one of the best drivers of our long-term gross margin goal will get us more than halfway there. But this year, it’s going to start – it’s going to have a little steeper tilt just because we’re actually going to see momentum come from Mobi and that improvement as the volumes increase.

Travis Steed: Okay. Helpful. And maybe longer-term, like when you think about that 65% margin goal, I’d like to think about it in terms of like installed base. You had a 450,000 installed base today. I think before when you gave that 65% margin goal, the goal is for 1 million installed base. Is that the right way to think about what you need in terms of patient growth to get to that 65% gross margin longer-term?