Tandem Diabetes Care, Inc.

Thank you for standing by and welcome to Tandem's second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, please press star 1-1 again. I would now like to hand the call over to Executive Vice President and Chief Administrative Officer Susan Morrison.

please go ahead thanks hello everyone and thank you for joining tandem's 2023 second quarter earnings call as a reminder today's discussion will include forward-looking statements these statements reflect management's expectations about future events product development timelines 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-Q, and the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Today's call participants include John Sheridan, our President and CEO, and Lee Vossler, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we'll take questions. Thank you in advance for limiting yourself to one question before getting back into the queue. John, you're welcome to begin.

Thanks, Susan, and welcome everyone to today's call. Reflecting on TANF's performance in the first half of the year, and the second quarter in particular, I am proud of our execution across the business. We achieved our sales expectation while demonstrating operational improvement as we exceeded our profitability target and returned to positive adjusted EBITDA. We also made exceptional progress with our new product innovations by starting the rollout of Tandem Source, preparing for the launch of two new sensor integrations, and most recently, reaching the exciting milestone of FDA clearance for Tandem Mobis. With these four new products, we are expanding our reach into different customer segments of the market beyond where we operate today, providing additional choice to new and existing customers and how they manage their diabetes, and demonstrating our excellence in delivering digital solutions to optimize care. This sets us up for another exciting period in the company's history, reminiscent of when we first introduced Control IQ to the market. These new products are also important in fulfilling our vision of having a unique portfolio of devices that meet the diverse needs of people living with diabetes and reinforces our leadership in automated insulin delivery. We anticipate that this wave of innovation may create turbulence in the overall market in the near term. To ensure that we maintain the highest level of customer satisfaction during the busiest months of the year, as we previously discussed, we will be scaling these launches throughout the second half of the year and into 2024. Customer awareness and excitement is quickly building. and this may impact the timing of purchasing decisions, particularly as it relates to Tandem Mobi, as customers weigh access to new products against the reset of deductibles in January. With this backdrop, we have introduced new promotional pricing for our Tandem Choice program for the remainder of the year. The program now provides customers purchasing a new T-SLIM X2 access to Tandem Mobi once it becomes broadly available for $199, rather than $999 it was before clearance. This helps provide customers seamless access to current technologies and may reduce the pausing dynamic we've seen historically with new product launches between the time the FDA clears the product and its availability. Having said that, it's difficult to predict the impact that this will have on our sales the remainder of the year. For that reason, and in combination with an increasingly competitive environment worldwide, We feel it's prudent to reset our 2023 guidance with a low point for expectations and a starting baseline for 2024 while we focus on driving the business. By doing so, we are establishing a path for tandem to deliver sustainable growth driven by our market-leading innovation pipeline. As we prepare to expand our technology offerings this fall, we're building on our strong reputation and decade of experience offering high-quality diabetes solutions and services. This was evident in the second quarter as our T-SLIM X2 continues to stand out as the number one rated automated insulin delivery system in terms of overall customer satisfaction. This was repeatedly reinforced as I spoke directly with healthcare providers at the recent American Diabetes Association scientific sessions that took place here in San Diego. Providers spoke to the importance of their patients having options for wearability, the benefits of pump detachability, and how different infusion sets, materials, and cannula insertion angles impact their patient's comfort and user experience. These comments underscore the importance of recognizing that people need options in how they wear and how they use their AID systems and reinforce our strategy of enabling our customers to personalize multiple aspects of that system. Another highlight was the positive reaction to demonstrations of Tandem Source at our booth. Keep in mind, this is our global data management application that was designed specifically with clinicians in mind. It provides a central location and comprehensive reporting to view critical patient data so they can spot trends and put these insights into use with their patients. We began rolling it out in the United States in June and will continue to progress its launch in the coming months with plans to deploy it globally on a country-by-country basis thereafter. For HCPs, TandemSource becomes even more meaningful with TandemMobi. which offers smart phone control and will be continuously connected to the cloud via mobile app. For customers, it's a platform to see important therapy data, and we plan to build around this in the future by adding experience-enhancing features for our customers that streamline supply reordering and new feature trainings. The ADA conference also reinforced that there's currently a high level of activity in diabetes devices. And that related pressure is likely to continue as new offerings launch both in the U.S. and internationally. In the second quarter, we began hearing more from our distribution partners outside the United States about new pump entrants, only some of which we have experience selling against. Even with an anticipated increase in competition, our longer-term opportunity outside the United States is meaningful. Our T-SLIM X2 with control IQ has been shown to deliver immediate and sustained benefits in all populations. and we are still in the early stages of building market awareness internationally. In the near term, we're cautious that external pressures may increase in advance of our own new product launches, the first of which will be new CGM integrations. T-SLIM X2 integrations with Dexcom G7 and Freestyle Liberate 2 sensors are on track for a skilled launch beginning in the United States this fall. We anticipate that TSLMX2 will be the first FDA-cleared pump that will offer a user options in CGM sensor integrations. Choice of more than one CGM is not only a differentiator, it's the true realization of interoperability and empowers users to make the best sensor decision for their needs and preferences. We want our customers to have the benefits of the latest CGM technologies, and being first to market with these new CGMs is evidence of our commitment to enable access and lead in systems integration. It takes a lot of collaboration and coordination to launch and integrate CGM systems. I'd like to thank Dexcom for their continued partnership and Abbott for their new partnership as we bring the benefits of our AID systems to even more people living with diabetes. In the United States, we are planning for Dexcom G Center integration to be broadly available in the first part of Q4 and Freestyle Liberate 2 integration to be broadly available in the middle of Q4. These will be followed by international launches with Dexcom G7 and Freestyle Libre 3. The pump software updates for these integrations will be offered to all in-warranty customers for no charge and can be completed from a personal computer. Turning to our next new innovation, Tandem Mobi is the world's smallest durable automated insulin delivery system. Redefining durable pump miniaturization, Mobi is leading the way in creating a whole new category of devices for insulin therapy. I am particularly proud of this clearance as it's our first expansion to our family of pump hardware offerings and as an opportunity to bring the benefits of our technologies to a segment of people living with diabetes who otherwise would not likely choose to adopt pump therapy. Already, we're hearing from future customers who plan to choose Mobi for its discreet small size, multiple wear options, iOS control, and our number one rated AID algorithms. In the second quarter, nearly two-thirds of our sales leadership reported that they are experiencing some level of new customer pausing and making their purchasing decisions to await the availability of Moby, and reported that this dynamic was even greater with our own renewal customers. This enthusiasm has grown even more following FDA clearance, and thousands of people have signed up on our website and through our call center for more information on Moby's availability. We plan to kick off our scale launch of Mobi with a limited release in early Q4, followed by broad availability in early 2024. Launching a new pump platform and the associated physician and customer education that goes along with doing it right takes significant time from our talented sales and clinical team. The fourth quarter is a period in which their time is already in high demand due to the seasonality of our U.S. business as they work to help customers maximize their insurance benefits before the typical reset at the end of the year. This is why making Mobi available through a scaled launch is even more important during this period. Turning to our pipeline beyond these near-term offerings, we are continuing development work for our hardware portfolio, which includes the T-SLIM X3, an extended wearer infusion set, a tubeless cartridge and infusion site feature for MOBI, and CIGI, our durable patch pump. We are also very active clinically. Enrollment for a study of people with type 2 diabetes using Control IQ, which includes a randomized control arm, began in the second quarter. We are also preparing for a clinical study set, our extended wear infusion set, and the first in-human trial for CIGI to begin in the fourth quarter this year. As you can see, we are executing well and are confident that we have the most exciting product portfolio in insulin therapy management. It's part of our commitment to relentless innovation, revolutionary customer experience, and operational excellence, which are mission-driven building blocks of our company. I'd like to thank our employees for their hard work in delivering on each of these in the second quarter. The team's fortitude and passion is how we are navigating 2023 and positioning Tandem for success. With that, I'd like to turn the call over to Lee to provide more information on the quarter and our guidance and expectations for the year. Here you go, Lee.

Thank you, John. As a reminder, unless otherwise noted, the financial metrics I'll be discussing today are on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on the Investor Center portion of our website. We exited the second quarter with a record installed base of nearly 440,000 people worldwide using our T-Slim X2 insulin pump, representing 16% year-over-year growth. Our second quarter performance was in line with expectations, generating $198 million in worldwide sales with over 29,000 pump shipments. Like the first quarter, comparisons to 2022 do not adequately portray our continued operational execution, particularly as it relates to our sales outside the United States and advancements in our product pipeline. In the U.S., sales were $145 million in the second quarter, with pump shipments increasing sequentially by 12% to 19,000 when compared to the first quarter. Well, over half of our pump shipments in the quarter continue to be driven by customers new to Tandem, and the source of these new customers remains almost evenly split between MDI and competitive conversions. We continue to see strength with renewal shipments, which have increased each quarter as a percent of total shipments from a consistent capture rate on an increased number of warranty expirations. We have already renewed more than 60% of our 2022 expirations with a pace to achieve 70% more quickly than years past, reflecting the high satisfaction and loyalty of our customer base. This puts our installed base of in-warranty customers in the US at approximately 305,000 driving growth in our supply sales by 10% compared to the prior year. Turning to our operations outside the United States, we generated $53 million in sales in the second quarter, shipping 11,000 pumps and growing our install base more than 20% year-over-year to nearly 135,000. We have now completed the transition to our European Distribution Center, which will support approximately 70% of our OUS sales going forward. We experienced approximately 2 million in sales headwinds in the second quarter related to the transition, mostly impacting supply sales. This operational implementation is very meaningful to the business as it provides relief to our distributors from the supply chain challenges they were facing and allows them to react more quickly to fluctuations in demand. It also creates efficiencies within our own operations and provides better visibility into our true business growth, which will more closely align with our reported financial results. Our OUS sales year-to-date of $92 million were impacted by approximately $20 million in total headwinds associated with the scale-up of the new distribution center, with roughly two-thirds attributed to supply sales. Turning to margins, our gross margin was 52% of sales in the second quarter. This was an improvement of nearly two percentage points year-over-year. We have now consumed nearly all of the high-cost raw materials acquired in 2022, which was the single biggest contributor to our gross margin improvement year-over-year. The impact in the second quarter was much more modest than quarters past at less than 1% of sales, and we do not anticipate any material future impact. We also improved our gross margin by more than two percentage points from the first quarter. Pumps increased to 51% of sales in the second quarter versus 49% in the first quarter, with this favorable product mix driving the majority of the gross margin improvement. We also outperformed and adjusted EBITDA expectations, returning to profitability at 3% of sales in the second quarter. When excluding certain unique items in the first and second quarters, such as IP R&D and facilities consolidation charges, we improved our operating expenses by 3 million from the first quarter, effectively balancing investments in R&D and marketing against cost management efforts. In fact, R&D has been our greatest area of spending growth in recent quarters, as we have invested in driving and accelerating our product pipeline. The incremental operating costs from our capillary biomedical and AMF medical acquisitions in support of this effort represented approximately 3% of sales in the quarter compared to no costs in the prior year. In all, we are proud that we met both our U.S. and OUS expectations for the first half of the year in this unique and challenging environment. The rapid waves of innovation that we will be introducing in the next few quarters positions us well to drive an inflection in growth in 2024 and beyond. As John discussed, this comes with a greater level of unpredictability in the near term, as the timing of our new product launches may impact sales. as well as recognizing increased competitive noise worldwide. With reduced visibility and due to the year traditionally being back in loaded from seasonality, we feel it is prudent to reset our sales guidance for the remainder of the year. We are confident that even with these unusual demand dynamics, at a minimum, we can achieve worldwide sales of $190 million in the third quarter and $785 million for the full year. For the U.S., one of the greatest variables is how the timing of MOBI availability affects customer purchasing decisions. Guidance reflects our confidence that even with this uncertainty, our pump shipments in the back of this year will be in line with the first half of 2023. This results in full-year pump and supply sales of at least $575 million. Seasonality is still expected to positively influence our fourth quarter with the expectation that it will represent the strongest quarter for pump shipments in the U.S. while Q3 is expected to step down modestly from Q2. Factoring in these dynamics, Q3 sales in the U.S. are expected to be at least $135 million. Outside the U.S., we are adjusting our full-year expectations to $210 million with Q3 sales of at least $55 million. This reflects improvement in the second half of the year following full implementation of our distribution center in Europe and seasonality in the third quarter, balanced with a more conservative approach to potential impact from competition. Drawing upon our experience in the U.S. last year, we think this aligns with our change to U.S. guidance and considers the uncertainty for some new entrants that we do not have as much experience selling against. As a result of these changes in sales expectations, we are revising our gross margin expectations to 51% for the full year. Also, we expect to remain adjusted EBITDA positive in the back half of the year, but we are revising our expectations for the full year to at least break even. This includes a revision to our recurring non-cash P&L charges, which are expected to be slightly lower at approximately $110 million, of which $95 million is associated with stock comp and $15 million with depreciation. Considering this reset and our overall 2023 sales guidance, we feel it is also important to calibrate early for 2024. We will learn a great deal in the next six months that will better inform our thoughts on growth next year, particularly as we scale the launches of multiple new products. Until that time, we would like to set expectations for baseline 2024 sales growth starting at 10%, which implies more than $860 million off of our revised 2023 sales guidance, and we will continue to provide updates from there. We remain confident in our ability to achieve the goals we set a few years ago to reach 1 million customers, but are going to withdraw the timing of our longer-term targets for now as we evaluate the speed of uptake for these near-term product launches. Our goals for achieving 65% growth and 25% operating margins also remain unchanged and are largely correlated to the adoption of our Tandem Mobi and SteadySet launches. To be clear, the actions we are taking today with guidance are to risk reduce external expectations. Our conviction in Tandem's ability to lead in diabetes management remains high, especially with the most comprehensive portfolio in our space. By doing so, we'll be executing on our mission to bring the benefits of tandem technology to hundreds of thousands more people living with diabetes worldwide. With that, I'd now like to ask the operator to open the call for questions.

As a reminder, to ask a question, you will need to press star 1 1 on your telephone. Again, that's star 1 1 on your telephone. To remove yourself from the queue, you may press star 1 1 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steve Lichtman of Oppenheimer and Company.

Steve, you there? Yeah, sorry, I was on mute. I apologize.

Hi, guys.

No problem.

Hey. Lee, you mentioned QQ coming in line with expectations. And as we think about what's embedded in the back half, what is assumed in terms of the upgrade program and potential benefit from that? And how does that get recognized if patients do take advantage of that program?

I'm sure. Thanks for the question, Steve. So the tandem choice program, it's the rest of this year, you're going to see what looks much like what you've seen in quarters past, which is on a gap basis, we will make adjustments. And part of that adjustment is based on our estimate of how many people will take advantage of the program in the future. But there's still no election this year. And there's so we won't have any change to that type of accounting. We'll still report our non gap sales on the basis of or normalized pump shipments, which would be comparable to how we were recording before the tandem choice program. And so when we thought about from a guidance perspective, we didn't particularly factor in that it would provide benefit or that it would offset any of the potential pausing. So at this point, the guidance was set with the baseline level in mind off of which we think we can achieve or overachieve.

And then in terms of the back half and then your initial comment on How are you factoring in the new CGM partnerships, you know, including the obviously the new partner with Libre, you know, including the OUS launches next year? Thanks.

Sure. So first of all, I'll say that we're super excited about the opportunities that it provides to us, and we believe that that will contribute to an inflection in growth in the future. At this time, with the limited visibility that we have in the market for the next two quarters as we work through these new dynamics, particularly with the Mobi launch and the timing of availability in the interim period, we're not factoring in any particular upsides for those opportunities. And so that's something that we could look forward to as being an opportunity to overachieve our minimum guidance.

I think we also have two and a half quarters to basically see how these products perform, and that's going to inform us as we enter 2024 with better understanding of what the growth rate might look like. Thanks, John.

Thank you. Our next question comes from the line of Matt of Barclays.

Hey, thanks for taking the questions. so i want to ask you know it sounds like this quarter shaped up to be kind of very much like almost uh spot on with kind of what you were expecting what the street was expecting and i'm just wondering you know with the adjustments for those you know for the um you know with the revenue adjustment um is that is that your feeling that it came in you know kind of very much as you expected. And I'd love to just get, you know, whether that's your assessment. And then a quick follow-up on the Q3 and some of the drivers there.

Sure. Thanks for the question. So I not only say second quarter, but first quarter, both came in line with our expectations from a sales perspective. And so we were well on track to achieving our goals for the year. But with the new dynamics of the Moby launch, this change in the guidance is not so much about how we got to where we are today, but it's what we're looking at going forward. And it's just this limited visibility that we have to how much pressure that the anticipation of Moby might cause in the market in the near term. And so we're just being very thoughtful about that and and reducing the risk that was potentially in the back half of the year pretty substantially. And so back to, you know, thinking about this guidance level that we set as really a low point or minimum baseline.

That's great. No, and, you know, obviously, congrats on the MOBI approval, and that is certainly nice to get that out of the way and start talking about, you know, those things reaching the market. And on that front, you know, you know, if the first half was kind of like very much in line with your baseline guide, excluding these other new product launches and maybe even including some of the effects of those things sort of circling around as you've talked about. In other words, people wanting to maybe wait or pausing here a little bit. If all of that was very much in line, you know, the Q3 commentary that you have, does that – You know, maybe if you could elaborate a little bit on how much of the beginning of these launches is included in Q3, or at this point, the way you're thinking about guidance is, you know, these really don't, you know, affect our numbers or the way we talk about guidance until Q4. If that's a clear question, it would be a super helpful color.

Yes, I think I understand the question. And so the way to think about the launches, the scaled approach that we're using is a measured launch across the months and the quarters. And so for third quarter in particular, well, as I already said, we're not factoring in upside from any of the new opportunities, but there isn't going to be much happening in the third quarter than heavy marketing and availability will be significant. will have increased by the end of this year. And so, as John said a few minutes ago, it gives us time to evaluate what's happening in the market to better understand the reaction to the new products that are starting right now versus people who might still be waiting for Moby. And then we can give more color clarity in a quarter or two on how those are trending.

Okay. Thanks so much.

Sure thing, Matt.

Thank you. Our next question. comes from the line of Chris Pasquale of Nefron Research.

Thanks. Lee, I wanted to go back to the guidance adjustment and what you guys are factoring in today that you didn't have visibility on at the beginning of the year. Because if I go back and look, I mean, the timing of the MOBI approval seems pretty much in line with what you were assuming back when you first guided for 23. So why only now factor in this pause, and why the big shift, and how you think the back half of the year is going to play out?

I guess I'll just say that one of the things that we've been pleasantly surprised by is just the excitement for Moby. And it's a relatively short period of time. But since the FDA approval, we've had a couple of conferences. And it's just significantly exceeded our expectations. And when you talk to the sales force, two-thirds of them say that they've already experienced pausing in the second quarter. So I think this is something that, you know, it's more than we anticipated. And I think it really does put us in a position where we, you know, it's just difficult to anticipate what the revenue is going to be like in the back half because of Moby pausing, also G7 and Libre pausing. And then there is some competitive dynamics as well. So, you know, it's just, I think rather than, you know, try to guess, we're just taking a conservative approach with guidance and we're just trying to risk reduce public expectations, we have a great deal of excitement and confidence in where we're at. And we think that these new products are certainly going to drive, you know, a fantastic 2024 for us. And the good news is that we are, you know, we are the only unpredictability or uncertainty we had was really the FDA. With that clearance gone, you know, we have complete control. And, you know, we're really seeing great momentum building within the company. And these things are happening in a matter of weeks.

Thanks for that, John. And then maybe I'll just piggyback on your comment about 2024. You know, 2023 features significant headwinds on a couple of different fronts. The international distribution changed. Now they anticipate a pause in pump orders as people wait for Moby to be available. So just from a math perspective, that would seem to make 2024 growth an above-trend year, given the baseline. I don't think that you would frame 10% growth as kind of above what you might expect the company to do long term. So help us understand why that's the right number, even before factoring in the impact of things like the new CGM options, et cetera.

Sure. So clearly, we would not ordinarily be giving any indications on 2024 this early in the year, but we felt it was important. based on the changes that we're making to the 2023 guidance to make sure that we're managing expectations appropriately. So I would say this is the first, we'll call them the first path minimum baseline again for the way to think about next year before any of these even become available or are added to the opportunity. And so we still feel very convicted about the high growth we can achieve with these new products on the market, but we felt like we'd be better able to give that kind of visibility after we've seen the uptake of them in the next couple of quarters and the traction that we get. But with the change in 2023, it was very important to make sure we help people understand where to start with 2024 at this time.

Okay, thanks. Thank you.

Our next question. comes from the line of Matthew O'Brien of Piper Sandler.

Hey, this is Phil on for Matt. Thanks for taking our questions. Just for starters, on the competition commentary, I was curious if you could parse that out a little bit further between perhaps the patch pumps on the market and the tube pumps. And as it relates to the recent 780G launch, has anything changed in your view on the launch of that product?

No, I don't think so. I think when you, you know, what we have talked about in the first half is that we've seen continued pressure, but things have stabilized. And I think that, you know, that's predominantly the patch device. And so, you know, I think we performed quite well in the first half in spite of that pressure. But there are new devices coming to market right now. And while we don't think that the impact of these will be nearly as meaningful as what happened last year, there always is some turbulence when new products come to market. And so I think we expect there's going to be some modest turbulence, not nearly what it was like it was last year. And we think we can manage through that. I think the real thing that's going to happen in the back half of this year is that Mobi is going to cause pausing. Mobi is going to be the real driver of the pausing. And I think that's really what this reset is about. Certainly, the other two devices that are coming to market will have some impact, but it's really all about Mobi.

That's helpful. Thank you. And to that end, when we think about that pausing and looking towards 24, how are you thinking about the full market release of Moby? How quickly will those, you know, patients waiting on the sidelines look to jump in? And I guess what I'm trying to get at is just overall cadence for that 2024 number you put out there.

Yeah, I mean, as we said in the prepared remarks, what we plan to do is early in the fourth quarter, we'll move into a early access program. We'll have hundreds of people using it. And we have an approach internally where we have a scaled and measured launch. And so we're going to be cautious at first to make sure that the system performs as we expected. This is just something that I think that it's the best thing to do for the company, our patients. And I think that as we grow in confidence, we would expect to move forward with a more directed commercial launch in the early part of 2024. And this is just typically the way it goes. And so I think as 2024 comes upon us, we'll start off and gradually increase the ramp. Clearly, in the meantime, we're going to be focusing a great deal on training the physicians and their staff, as well as advertising, marketing, and just ramping up the messaging. But I think it's going to start aggressively in 2024.

Thanks so much. Yep.

Thank you. Our next question. comes from the line of Matt Taylor of Jefferies.

Hi, thank you for taking the question. I was hoping that you could put the pausing dynamic that you're expecting or forecasting here in context with other pauses that you've experienced or that competitors have experienced. Is it greater than, less than, if you can quantify it? And then I guess if you're aggressively going to be launching in 2024, Why wouldn't the baseline be more than 10%?

Sure. So I'll give you two examples. I would say on the extreme ends of the spectrum in terms of pausing that we've seen before. The first one was back in 2016 with the approval of the 670G and it created a very significant market disruption for a number of quarters. We also saw it again with Control IQ in the fourth quarter of 2019 when we received approval And even with the marketing and understanding that it's a free software update, we still saw people wait. They waited until it was available on the pump. And so those were extreme examples of a severe level of pausing versus a modest level of pausing. And so, Moby, it's interesting, as John mentioned, the enthusiasm we've heard in just a few short weeks since approval without even a heavy marketing campaign out there yet was very high. And so, we are trying to be considerate of what that might do in the next couple of quarters. And we hope that the Tandem Choice Program gives people a pathway and helps people be able to move forward with purchases now, but we can't be certain at this time. And so what we're doing is we're taking an approach of reducing the risk as much as possible in the numbers, and I would say the same for 2024. So while we gather this information and understand better the uptake, the interest, and the timing, we don't want anyone to get ahead of us. And so we thought it was prudent to reset it at a minimum level that you could think of as a baseline, and then you could see the opportunities from the new products as upsides from there.

And, Matt, I would just add that, you know, the second half of the year is where we get the majority of our revenue, particularly in the fourth quarter. And, you know, the dynamic of just having a new device in the market and, you know, the sales force just outselling to deal with the deductible reset, it just creates a variable, I think, that we really haven't seen before. And something that does just, in addition to having a new product, it's also the timing of it creates uncertainty as well. Okay. All right.

Thanks, John. Thanks, Lee.

Thank you. Our next question comes from the line of Philippe Lamar of Citi. Please go ahead, Philippe.

Hi. Actually, I think it's Joanne from Citibank. The question that I have is multifold. Number one, what do you think the adjusted EBITDA will be in 2024?

So we're not giving that level of guidance at this time, but I will say that we expect improvement over 2023 as we continue to move through our profitability initiatives. And so I think we actually demonstrated very nicely from the first quarter to the second quarter our cost management efforts. and we'll continue to implement more efficiencies that will drive that additional opportunity as we go forward. Much of that comes from our customer service functions and how we continue to streamline, automate, and improve the way we interact with customers while still keeping their satisfaction levels in mind. And so stay tuned on what that will look like exactly in 2024, but you can expect improvement over this year.

Okay. Is there a chance... I have two questions, so bear with me, please. Is there a chance that... you're going to be selling Moby into the pharmacy channel. And I'll toss my second question in, or maybe my third, which is when you put together the numbers, originally they were, quote, conservative, and there wasn't supposed to be any upside from Moby. So now halfway through the year, those conservative numbers aren't conservative, and you're getting downsides from Moby. So help me reconcile this, please.

I'll start first with the pharmacy question. We are certainly using MOBI as an opportunity to introduce ourselves to the pharmacy channel. So while I believe we'll get some level of uptake there, it probably won't be material and it won't be for quite some time as we build that capability. We're still very focused. In fact, our number one priority today is to make sure that MOBI is on all of our DME contracts so we can move forward with a commercial launch unimpeded by that. And we're very comfortable with the timing and that we'll be able to accomplish that. And so when we think about the original numbers, so the biggest change where we are today is really the solidifying the timing of everything. And so while we had expectations for a timing for clearance preparing, which we expected potentially in the first half with the back half launch. It's the good and the bad. The timing of when MOBI was approved made it very challenging for the back half of the year. And you have to think about the fact that Q4 being such a heavenly seasonal period with so many other activities going on, on top of our CGM launches at the same time, it's important for us to stage these launches appropriately. And as John explained on MOBI, it's even more important because this is a whole new form factor that we want to make sure that we have well tested and market ready when we go to full commercial availability. And so what we didn't know at the beginning of the year was the level of excitement that would come with the Mobi approval, the exact timing of it, and how this would scale out amongst our other product launches. And so it creates a period of limited visibility. We have taken an approach of reducing the risk as much as possible in the numbers. We've heard loud and clear up to now that people struggle to believe our numbers in the back half anyway. And we thought it was prudent to just do a complete reset, take that risk off the table, and factor in the level of impact MOBI could have. Not to say that it will have, but there is the potential that it could cause significant disruption in the next two quarters. We want to see how that plays out before and make sure you and we, no one gets ahead of us at this point.

And that's the basis for where we are today.

Okay, thank you. Thanks, Joanne.

Thank you. Our next question. comes from the line of Travis Steed of Bank of America Security.

Hi, this is Stephanie Piazzolla for Travis. I was hoping you could elaborate a little bit more on the EBITDA guide for this year. Just wondering kind of what dynamics factor into the break even for the full year with revenue, the revenue reset down in the second half.

Sure. The only reason for the change in the EBITDA guide at this point was tied strictly to the change in the sales expectations. You know, they go hand in hand. We still expect that we will continue to be successful in our cost management efforts. And so for now, you can think about spending being roughly flat from where we are today through the back half of the year. We won't, though, hold back as needed to make sure we move our R&D projects forward. And we will also spend as much on marketing as we think we need in order to continue driving the tandem awareness as well as the new product awareness. And so with those factors in mind, it brings EBITDA to we know we can be at least positive.

Thank you.

Our next question comes from the line of Alex Nowak of Craig Harlem. Your line is open, Alex.

Okay, great. Good afternoon, everyone. Just a question around the cost improvements that we should expect with Moby on the supply side. You know, I think we know pretty well that the pump is going to come in I think you said previously about 25% cheaper to manufacture. But what about on the cartridge side? And just given the redesign there and perhaps on the infusion set side?

Sure. So from the pump side, just to be clear, we expect that to scale up and reach those efficiencies over the course of a year from launch. And so over the course of 2024, you'll begin to see improvement in gross margin. And the pump itself is about a 10% to 15% lower manufacturing cost. The cartridges are expected to have a greater than 20% reduction to manufacturing costs. The benefit from that you likely won't see for a bit longer as it takes time to build in that install base before you actually see it on the gross margin results. But we do look forward to Moby becoming a bigger piece of the business. That alone drives us more than halfway to our 65% margin target, and I think you'll start to see it next year.

Okay, makes sense. And then I just want to clarify a question with regards to next year. As you launch Mobi G7, Libre 3 integration, in 2024, just what additional spending will you need to make or the investments that you've done over the last three years, does that really put you into a nice position here to leverage those expenses next year as we get out of the pausing dynamic and we really start to see these new products ramp up?

The way you can think about spending is much like you're seeing what's happening in the last quarter and what you'll expect to see going forward is that we'll continue to prioritize investments in R&D so we can move our product pipeline forward. And everyone is well aware of what we have in the pipe that's coming down the road. We also will not be shy about investing in our marketing activities to ensure we're getting broad reach and make sure our voice is loud and well heard, especially in the timing where there's these pausing dynamics. We want to make sure people know what's coming next from us. But we do expect to have continued efficiencies. The beginnings of those you saw this quarter will continue in the years to come. Tandem Source, which we haven't spoken much about today, but it's one of our core products in launch right now, is a great facilitator. It's the new platform and infrastructure that allows us to create even greater efficiencies with our customer service functions. And so that's something that you'll continue to see year over year is improvement or reduction in that cost to serve.

Understood. Appreciate the update.

Thank you. Take care, Alex.

Thank you. Our next question comes from the line of Jason Bedford of Raymond James.

Good afternoon. Just questions on renewals. And I may have missed it, but I think last quarter you talked about the sequential move in U.S. renewals was similar to the sequential move in U.S. shipments. And so I guess if I look at 2Q, you grew U.S., pumps here at 12% sequentially. Is that a fair way to think about the sequential move in renewals in 2Q? And then just as a related question, in terms of the U.S. revision here, is there any way to parse out what's due to fewer new users versus a slowdown in renewals?

I'm sure I'll start with, obviously, the first question. From a renewals perspective in the second quarter, I'm obviously very proud to say that we continue to get great traction there. And so from Q1 to Q2, just to be clear, we saw an increase both in new and renewal pumpers. The increase in renewals growing at a bit faster clip than the new pumpers. And we're capturing people at the same rates that we saw last year. So even before some of the challenges we saw in the back half of 2022, we were improving our renewal rates and continued that up until now. And in fact, what we're seeing are we're capturing people, I would say, faster. So people are moving through the renewal cycle earlier than we have seen in years past. And that's great because not only for the rest of this year, we have a number of increased opportunities from renewals, as you think about 2024, it grows again from the 50,000 people in the U.S. we sold plumps to four years ago to more than 70,000 next year. So it's great to see this traction. The way we thought about the guide for the back half of the year, it's a little bit different because with Moby, you've heard me say this over and over, and considering what impact it might have, we looked at the different drivers of our business. So competitive conversions, we looked at MDI conversions, and we looked at renewals. And we considered the impact that Moby may have on those three different populations. And we don't necessarily think it's the same across the board, but we did take what I would say is a healthy reduction across all three to factor in that regardless of where people are coming from, they may just wait for Moby to be available to them in general availability early next year.

And so that's something that we took into consideration when we put together the guide.

Thank you.

Thank you. We stand by for our next question, which comes from the line of Danielle Antelphi of UBS. Your question, please, Danielle.

Thank you. Good afternoon, everyone. Thanks so much for taking the question. I wanted to ask about what you're seeing in the market, like from a market growth perspective. in the U.S. and internationally, and if any of this has to do with any change in underlying insulin pump adoption from your perspective, or do you still think that is a, you know, call it double-digit growth market here in the U.S.? Thanks so much.

Sure, so we have limited visibility right now to the entire market considering we only have one quarter with everyone having released their numbers and we have more to come for this quarter. We did come in within our expectations for Q2, so I think that suggests it's right in line with what we anticipated. What that means for overall market growth, it's hard to say at this very point. And I'm speaking to the U.S. more so there right now. In OUS, too, the market's still big and growing. We still see high demand for our products, so we haven't seen any changes in the dynamics there. But we have taken some conservatism as we think about the back half of the year. Just as John said earlier, you know, just the space, how many people are in it, new entrants, and just being particularly cautious, you know, based on our learnings here in the U.S.

Thank you. Thank you.

Our next question comes from the line of Joshua Jennings of TD Cohen.

Hi, this is Brian here for Josh. Thanks for taking my questions. First, just a clarification. Can you address the inclusion or exclusion of U.S. MOBI in the 10% growth outlook you provided for 2024? I'm assuming it's included in that number, but just given the guidance initially. I wanted to confirm that. And if I can, will there be any other new product launches in 2024 apart from U.S. Moby?

So the way to think about 2024, it's really the, I would say the first inflection comes from all the products that we are launching right now. So we're going to get modest benefit in the remainder of 2023, just based on the timing. And we'll learn a lot more about the opportunities they can drive for us next year. So I would say at this point, we believe we can get continued growth. thinking about that 10% level, but I would not put it in the outstanding category yet. And as we continue to evaluate the opportunities or the traction we get on the products in the next six months, it will inform us a great deal more about how to factor in those expectations for 2024. And so we do expect they will all be available, but we want to be cautious in the meantime and set a minimum for expectations just to make sure we're managing people and keeping them in the right place for now.

And Ryan, relative to products 24, I would just say that right now we're really focused on getting these four products to market in 2023. And I think that as we enter 24 in our fourth quarter call, we'll probably talk more about what to expect in the 24 timeframe that's new.

Thank you.

Our next question comes from the line of Matthew Blackman of Stifel. Your question, please, Matthew.

Hi, this is Colin on for Matt. In light of the rumblings you've heard from your OUS distributors, and I appreciate you've likely been asked about competition in the various large markets, including the UK, but taking a step back, can you give us a sense of the size and the growth of the UK pump market and where you think pump penetration at in the UK and these other large markets like France and Germany? You said 10 to 20% for EU broadly, but I assume that the UK maybe closer to the U.S. in terms of penetration? Any color there would be really helpful.

Sure. So I'm not going to be able to provide a lot of color. We haven't given that level of detail and do not expect to be talking about any single market in terms of our OUS opportunity other than it's still a large market. In fact, the type 1 population where we operate is twice the size of the U.S. market. Vastly underpenetrated, we have talked broadly about an average or a range of 10% to 20%. There are a few markets that are more similar to the U.S. in terms of penetration, but many or most, I would say, fall in the category of a lot of room to run until they get anywhere near where the U.S. is today. And so we still think that's, you know, that is one of our greatest growth opportunities as we look forward.

Significant growth opportunity, which we intend to take advantage of. I mean, these products that we're bringing to the United States now certainly will be available in the OUS countries in the not-too-distant future.

Okay, great. And I also wanted to ask one about the state of the U.S. commercial selling team in light of the current competitive environment, multiple new product launches. How are things progressing in the U.S., and what's your outlook for either RepCount or kind of the sales team going forward in light of the multiple new product launches you've got late in the year and into 2024? Thank you.

Well, I'd say they're incredibly excited. They're motivated. They are really looking forward to getting their hands-on these products and just getting out and talking to the physicians and their staff about it. So I'd say that's a very motivated team right now. I think that as far as headcount goes, we always evaluate that near the end of the year. We haven't made anything specific, maybe specific comments about this point in time, but, you know, we'll look to the end of the year and see how we're doing. And I think that, again, I think that it's a very positive environment. We haven't seen any attrition and the team, as I said, is very motivated and we're excited to get products to market.

Thank you. Thank you.

As there appear to be no further questions in queue, that does conclude Tandem's 2023 second quarter earnings call. Thank you for participating. You may now.