Tactile Systems Technology, Inc.

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 risk 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 10Q filings to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligations to publicly update or revise our forward-looking statements as a result of the new information, future events, or otherwise. This call will include references to certain financial measures that are not calculated in accordance with general accepted accounting principles or GAAP. We generally refer to these 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 Revers, Tactile's Medicals President and Chief Executive Officer, along with Elaine Berkmeyer, Tactile's Chief Financial Officer. I would now like to turn the call over to Mr. Revers. Please go ahead, sir.

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. And 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 a 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're 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 AfloVest, 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 offerings. 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 pre-sales task 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 percent 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, Entrez Plus, our next generation Entrez 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 Entrez Plus system continue to be warmly received by patients, including features like active garment deflation, its easy-to-use LCD controller, and its ability to treat two limbs simultaneously. We've also improved our team's level of focus, on the largest segment of patients that qualify for a basic pneumatic compression device. As a reminder, insurers like CMS require patients to initiate therapy with a device in this category, like our Entrez 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 Entrez 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 comfort ease 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 salespeople compared to 246 at the end of the third quarter. With respect to our airway clearance product line, While sales remained paced by one large DME that returned to pre-COVID criteria in May, we were heartened to see their ordering volume improve 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 on 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 comorbidities, 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 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 Kiley mobile application provided more than 22,000 users with direct access to educational resources, as well as tools to track their symptoms and monitor disease progression. And finally, we continued to progress through the enrollment phase of our multicenter randomized control 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 enrollment 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 payers, clinicians, and patients. And 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 Entrez 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 drive 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 gap net income while improving our adjusted EBITDA margins by 340 basis points to 10.8%. And 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 Aflovest 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 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?

Thanks, Dan. Unless noted otherwise, all references to fourth quarter financial results are on a gap 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 Entrez systems, increased $3.7 million, or 5.6%, to $69.5 million. And sales of our airway clearance products, which include our Apple vest 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 provided a detailed gap 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 35 cents per diluted share compared to $4.6 million or 23 cents 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 31st, 2022. Turning to a review of our 2024 outlook, which we introduced in our earnings press release today. We expect full year 2024 total revenue in the range of $300 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 gap growth margins to be approximately flat to prior year, our gap operating expenses to increase approximately 10% to 11%, interest expense of approximately $0.6 million, a tax rate of 30% and a fully deleted weighted average share count of approximately 24 million shares. We also expect to generate adjusted EBITDA of approximately $33 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?