Tactile Systems Technology, Inc.

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

Good afternoon, and thank you for joining the call today. With me from Tactile's management team are Dan Revers, President and CEO, and Elaine Berkemeyer, CFO. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties, which could cause actual results to differ materially from those indicated, including those identified in the risk factors section of our annual report on Form 10-K, as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time on 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. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. With that, I'll now turn the call over to Dan.

Thanks, Sam. and welcome everyone to our first quarter 2024 earnings call. Let me start by providing a quick agenda for today's call. I'll begin with a high-level overview of our strong first quarter financial results and the key drivers of our sales performance, followed by some color on how we've advanced each one of our strategic priorities that we laid out in February. Elaine will then walk through our quarterly financial results in greater detail, And I'll conclude with a few final thoughts before we open the call up to questions. With that, let's turn to a review of our first quarter financial performance. Our total revenue grew 4% year over year to $61.1 million, in line with our expectations. We were pleased with this performance to start the year given our strong first quarter results last year and believe it provides a solid foundation to deliver on our 2024 operating plan. Looking at our revenue performance by product line, lymphedema revenues increased 5% year-over-year to $52.3 million, and while our airway clearance revenues declined 4% year-over-year to $8.8 million, we demonstrated a second straight quarter of sequential improvement. Our lymphedema growth was in line with our expectations for the quarter, while sales of AfloVest were slightly ahead on a steeper year-over-year comp reflecting broad-based growth among most of our DME partners and lending confidence for the rest of the year. Beyond our revenue performance, we also continued to gain momentum down the P&L, specifically with respect to a 100% increase in adjusted EBITDA versus prior year. Our cash balance reflected another strong finish as we benefited from significant progress with our collections, working down our accounts receivable, a key element of our 2024 strategy to drive continued free cash flow generation while also deploying investments in our technology roadmap, which I'll expand upon shortly. With our financial highlights as a backdrop, I'd like to share a bit more about the operational progress we made in the first quarter. As we shared during our last update in February, we cited three key areas of focus for 2024 – an investment in growing headcount and productivity within both our lymphedema and respiratory channels, along with expanding our AfloVest DME participation. We also described a series of tech-related investments intended to improve our customers' prescribing experience as well as our own internal effectiveness. And finally, we described a next-generation lymphedema therapy platform as well as our commitment to conclude our head-and-neck study and share results near the end of the year. I'm pleased that we've moved every one of those initiatives forward in the first quarter, and we'll share more color on each. Beginning with our sales channels, from a headcount perspective, we ended the quarter with 269 field sales representatives, adding 15 since the beginning of 2024, and up approximately 9% in comparison to the 246 representatives that we had at the end of the first quarter of last year. These added reps came on later in the quarter, and we look forward to their increasing contributions in the second half of the year once they're fully trained. Productivity continued to advance among our legacy reps during the first quarter, specifically by continuing to focus on reducing the amount of time our reps spend on non-selling activities like in-home patient demos. As a reminder, our reps have historically devoted a significant portion of their time conducting payer-required in-home patient demos and obtaining the necessary documentation to complete orders and submit claims, a necessary task, but it clearly limits their time with prescribing clinicians. Our patient training staff is well-equipped to introduce our therapies to patients and educate them on its use. Thus, we've been focused on assigning more of these home-based demos to them. This was a significant contributor to sales productivity gains last year. As we started 2023 with the sales force performing the majority of these pre-sales demos in the home and ramped to approximately 30% of them performed by our trainers by the end of last year. In the first quarter, we continued that momentum. completing 35% of in-home demos by trainers, allowing our reps to benefit from the added selling bandwidth. During the first quarter, we also continued to see a favorable response to our recently introduced products, particularly our Entrez Plus system. With Entrez serving as the entry-level treatment that many payers require the patient to try first, including Medicare, our focus on serving the patient wherever they enter the therapeutic funnel continues to pay dividends. We also saw a solid reception from our recently launched comfort ease garments to treat lymphedema for upper extremities, bringing relief to even more breast and head and neck cancer survivors. Before shifting to an update on airway clearance, it's worth noting that we achieved our lymphedema results in the first quarter of despite being among the many healthcare companies impacted by the Change Healthcare cybersecurity breach within UnitedHealthcare's Optum branch that occurred earlier in the quarter. On February 21st, we were notified of a cyber event at Change, a third-party provider of technology used to verify patients' benefits and bill for medical insurance claims that led them to disconnect certain IT systems and services with customers, including Tactile Medical and Brighttree, our external billing provider. We'd been using Change Healthcare for electronic verification of patient benefits, while our actual claims processing and billing is conducted using Brighttree. Upon learning of the cyber event, our team acted swiftly to address these operational gaps, pivoting to a new partner within days to conduct electronic benefits verification While Bright Tree was impacted by the cyber event, we again promptly found alternative ways to continue submitting claims, thereby further minimizing the impact on our patients, cash collections, and our broader operations. I'm proud of the way our entire team swiftly responded to this situation and believe it reflects the leadership in place at Tactile. To have achieved our lymphedema growth this quarter with minimal disruption to both patients and our operations in the face of these unforeseen headwinds is a testament to our commitment to our tech-forward strategy and how nimble our organization has become. Now a few comments on our airway clearance progress. As I mentioned earlier, our first quarter airway clearance results were slightly better than we expected thanks to the broad-based strength among most of our DME partners. In fact, Excluding the one large DME affected by the PHE waiver that we've discussed earlier, collective revenue from all other DME customers increased over 20% in the first quarter as compared to the first quarter of 2023. With respect to the DME customer whose ordering was particularly affected by the PHE waiver, we were pleased to see shipments continue to stabilize in the first quarter. Over the long term, We continue to expect sustained growth from AfloVest, our airway clearance system, particularly following the anniversary of the PHE waiver expiration this May, when we anticipate the affected distributor lapsed the issue and no longer serves as a headwind to our growth. We remain focused this year, not only on expanding our AfloVest sales specialist count, but also onboarding additional DMEs, and demonstrating how AfloVest can be a valuable new offering for their large base of existing complex respiratory patients. To that end, we made further investments during the first quarter in our sales specialist staff, increasing the number of airway clearance reps to 17 from just 12 a year ago. These investments in our sales team will help increase our coverage of existing DME customers as we educate, train, and support their reps on bronchiectasis and the role of Aflovest in their care, as well as to enlist even more branches to make Aflovest part of their treatment arsenal. Turning to an update on another of our key focus areas for 2024, a number of our tech-related investments advanced in the quarter. As we shared during our February update, we're making strategic technology investments this year while still demonstrating leverage in our P&L, and they're progressing well. A portion of these investments involve enhancing various back office processes, including our method of verifying patient benefits. As I mentioned earlier, we've recently transitioned to a new, more efficient electronic method of verifying benefits intended to accelerate order processing. Separately, we've begun piloting an e-prescribing platform to streamline how we collect and exchange patient medical records with payers during the prescription process. This is intended to make documentation and authorization easier for healthcare providers, as well as our sales and internal teams. We also expect this to support our goal of maximizing our first pass claims approval with Medicare, an area we've already made significant progress over the last 18 months. As an update on Medicare, we continue to monitor the introduction and administration of the new Lymphedema Treatment Act. While we remain encouraged that it will bring more awareness and access for basic or conservative therapies, we continue to watch for any impact as the policy's interpretation emerges among Medicare administrators. That said, while our own local coverage determination, or LCD, has been in place for many years for lymphedema pumps, We've seen some subtle changes in how Medicare administers the policy. Our own movement toward an e-prescribing tool is intended to even more efficiently pair the necessary documentation with their adjudication process, striving for more efficiency among all parties. In fact, our recently deployed pilot across a handful of regions is off to an encouraging start This tool will make the order and prescribing process easier for HCPs, while also positively impacting our Salesforce productivity, given our reps and back office would need to spend less time gathering patient documentation. While broader deployment isn't expected until later in the year, we're excited about the impact it can have on our business in 2025. We also remain on track to introduce a new customer relationship management tool, or CRM, later this year. While we have an incredible amount of data, we know that optimizing it for our users can improve internal communication, sales productivity, and ultimately growth. Among the benefits in mind, we expect to provide better visibility to both our sales and trainer teams. so we can more efficiently assign and fulfill demos and trainings. A CRM, along with Kylie, is also expected to help us follow each patient's journey, ensuring we introduce the right progression of therapy based on their progress. Our sales force is excited about these new tools and the ability to ultimately advance customer orders faster. Our product development efforts continued to advance as well. Development on our next-generation lymphedema therapy platform remains on track for a late 2024 introduction. It's expected to bring a host of new lifestyle-friendly attributes to patients, even further improving the user experience and demonstrating our ongoing leadership in this space. We also continued to see patient uptake of our Kiley mobile application during the first quarter. At the end of the first quarter, we had over 26,000 unique user profiles registered in Kiley. Moreover, we saw almost 50,000 user check-ins during the quarter. As a reminder, the Kiley application provides direct access to education resources and tools for patients to track symptoms and their disease progression. We continue to believe Kiley is an important part of their therapy experience. Now a few updates on our clinical education and clinical evidence progress. On the heels of a record year for medical education in terms of patient and clinician engagement, we started 2024 off even stronger, reaching over 3,000 clinicians in the first quarter alone across our lymphedema and Aflovest product lines. Our first quarter medical education programming was specifically focused on lymphedema and and bronchiectasis diagnoses, their comorbidities, and available treatments. We also hosted a number of targeted CEU-eligible education events for respiratory therapists focused on specific patient populations, including bronchiectasis, that drew over 200 attendees, as well as training on detecting radiation fibrosis for oncology clinicians. That attracted over 400 attendees. In addition to our progress on education, we continue to fortify the clinical evidence supporting the impact of our products on lymphedema patients. During the first quarter, we completed enrollment in our multicenter randomized control clinical trial evaluating FlexiTouch Plus for the treatment of lymphedema among head and neck cancer survivors. With enrollment complete as of the end of last month with 235 patients, We now move to following these last in patients for six months before tallying all of the results. As a reminder, this trial compares the effectiveness of FlexiTouch versus standard of care over a six-month duration. Outcome measures include both physical improvements as well as bio-social quality of life results. With over 400,000 oral cavity and pharynx cancer patients currently living in the United States, and the majority likely to have or develop lymphedema. We remain committed to providing a more available path for those needing and seeking treatment. We're proud and enthusiastic about this trial so far as it represents the largest randomized clinical trial ever conducted among head and neck lymphedema patients. The study has 10 enrolling sites, including preeminent cancer institutions like Vanderbilt, Johns Hopkins, and Rush University Medical Center. Given the six-month patient follow-up period, we expect initial results from the trial to be available near the end of the year and look forward to sharing additional details with you once available. We were also pleased to see results from a new clinical study among VA patients published in the Journal of Vascular Surgery last month. The study, a Foresight multicenter trial, followed 179 veterans with lymphedema that were being treated with FlexiTouch. This is the largest ever peer-reviewed prospective study among lymphedema patients using pneumatic compression therapy. Among the statistically significant findings, patients using FlexiTouch therapy demonstrated improvements in quality of life as well as decreases in cellulitis events and limb girth and improvements in skin changes, Patients were evaluated at four intervals over 52 weeks, and while compliance to self-MLD was well below 10% among subjects, it reflected 92% compliance with their FlexiTouch at four weeks, and 72% remained compliant five to seven days a week, even after a full year of therapy. These results not only reinforce the clinical efficacy of FlexiTouch on patients' with varied disease levels, but also underscore how the positive results patients experience with our therapies yields high compliance. Overall, I'm proud of the work our team accomplished surrounding all of our education and research initiatives, and I look forward to continuing to raise awareness at each of the payer, clinician, and patient levels as we progress through the year. With that, Elaine, We'll now review our first quarter financial results in more detail. Elaine?