Welcome, ladies and gentlemen, to the First Quarter 2024 Earnings Conference Call for Tactile Medical. [Operator Instructions] 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 Bentzinger 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 Reuvers, President and CEO; and Elaine Birkemeyer, 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 in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of 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 AffloVest 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 road map,…

Thanks, Dan. Unless noted otherwise, all references to first quarter financial results are on a GAAP and year-over-year basis. Total revenue in the first quarter increased $2.2 million or 3.8% to $61.1 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch and Entre systems, increased $2.6 million or 5.1% to $52.3 million. And sales of our airway clearance products, which includes our AffloVest system, decreased $319,000 or 3.5% to $8.8 million. Continuing down the P&L. Gross margin was 71.1% of revenue compared to 70.5% in the first quarter of 2023. Non-GAAP gross margin, which excludes noncash intangible amortization in both periods, was 71.6% compared to 71% in the prior year. The increase in non-GAAP gross margin was attributable to lower manufacturing and freight costs. First quarter operating expenses increased $1.1 million or 2.5% to $46.4 million. The change in GAAP operating expenses reflected a $1.1 million increase in sales and marketing expenses and a $0.8 million increase in reimbursement, general and administrative expenses. These items were partly offset by a $0.7 million decrease in noncash intangible asset amortization and earn-out expense. Operating loss decreased $0.8 million or 22.1% to $3 million. The decrease in operating loss was driven by a $2 million or 4.7% increase in our gross profit, offset by the aforementioned $1.1 million increase in operating expenses. Non-GAAP operating loss decreased $0.5 million or 22.3% to $1.7 million. As a reminder, our non-GAAP operating income excludes noncash intangible amortization and earn-out expense as well as certain nonrecurring operating expenses. We provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other income net increased $1.1 million or 115.6% to $0.2 million. The increase was due to higher interest income and lower interest expense, primarily driven by the retirement of our revolving…

Thanks, Elaine. The first quarter was another opportunity for us to demonstrate continued progress across our key financial and operational priorities. I'm pleased with how the company is set up for further execution through 2024 and especially proud of the way our team continues to lead through change, all with the goal of delivering the best products and therapy possible for lymphedema and bronchiectasis patients. Before concluding our prepared remarks, I'd like to comment on the press release we issued on April 23, announcing my retirement as of the end of June and the appointment of Tactile Board member, Sheri Dodd, as the company's next Chief Executive Officer effective July 1. Sheri has an extensive track record as a health care industry veteran, having served in leadership roles across companies such as Medtronic and Johnson & Johnson, where she focused specifically on the chronic care space and developed health economics and reimbursement expertise. She's also developed a deep familiarity with our business through her service as a member of our Board of Directors since 2021. As a Board member, she's contributed a thoughtful perspective to our current direction, and her experience will undoubtedly enable her to quickly focus on advancing strategies to drive Tactile's next phase of growth. I'm excited to welcome her to our new operating role and look forward to working with her to ensure a smooth, uninterrupted transition. Personally, I'm excited about my next chapter, including more time with my family. But I'll remain as an adviser to Sheri following our transition as well as continuing to serve on our Board of Directors. Indeed, I remain heavily vested in the ongoing success of Tactile Medical, and my interests remain aligned in delivering shareholder value. Stepping back, I'm proud of what we've achieved during my tenure at Tactile. We refreshed our best-in-class product portfolio across pneumatic compression segment, added HFCWO vest therapy to treat bronchiectasis, advanced clinical evidence and served thousands of new patients in both segments. We also assembled a world-class leadership team, strengthened our balance sheet and have delivered solid growth in both revenue and profitability. Our progress and momentum underscore my confidence in Tactile's future. I believe the company is well positioned and on track for delivering consistent, sustainable and profitable growth in 2024 and beyond. We have clear and actionable initiatives in place to help fuel this growth and the right leaders in the right seats to execute it. I'd also like to take this opportunity to thank the Tactile team. It's been humbling to have been able to attract such capable talent across the organization, and the passion they bring to our mission every day is inspiring. I'm certain they'll continue to deliver for patients and shareholders. And with that, operator, we'll now open the call for questions.

[Operator Instructions] And our first question will come from Adam Maeder with Piper Sandler.

Congrats on the nice start to the year. And Dan, it's been a pleasure. Certainly wishing you well in retirement. I wanted to start on the modeling side for you, Elaine or Dan. But I wanted to ask about phasing of quarterly revenue for the rest of the year. And for Q2 specifically, I show consensus at about $73 million which is, I think, close to a 20% increase sequentially quarter-over-quarter. So wondering if you have any comment to the phasing of revenue on the top line. And then a similar question as it relates to adjusted EBITDA. I know margins in Q1 are seasonally weaker, but just help us kind of bridge to that $33 million to $35 million guidance for the full year '24. And then I have a follow-up.

Yes. Thanks, Adam, for the questions. I'll take a shot at the beginning and let Elaine kind of back clean up on this one. But I'd say that we continue to provide as we're happy to reinforce our guidance for the full year. I'm not going to necessarily provide quarterly guidance, but I think it's fair to expect some modest improvements in growth in both our pneumatic compression as well as in the AffloVest category as well. So as is typical, you'd typically see some ramp into the second quarter and sequential improvements in revenue each of the next 3. So I don't think anything terribly out of the ordinary in some of the kind of step-up that we've seen in the past. I think you had a question about operating income as well. I think I'll let Elaine take that one.

Yes. I think as you mentioned, our first quarter, we're always the leanest in terms of profitability. So this followed a very similar pattern, but we were pleased to see that adjusted EBITDA did double from a year-over-year perspective. And as in years past, that adjusted EBITDA margin does continue to build.

Yes. Typically, the back half is where we end up realizing the majority of our operating contribution. It's been that way for the last few years. I think we were just happy to be able to see a healthy positive number in the first quarter, which hasn't always been the case.

Yes. Good color there, guys. And for the follow-up, I wanted to ask about head and neck. I guess a multipart question here. First, can you just remind us the key objective for that trial? I believe it's to develop clinical evidence to support payer coverage, but wanted to confirm that. And then when should we think about a potential contribution or impact commercially to your business? Assuming a positive trial, is that beginning in 2025, back half of 2025? Presumably, there's some blocking and tackling with payers. And lastly, would you expect this to be a Tactile specific benefit? Or would this lift the entire lymphedema category for head and neck?

Yes. Thanks for the question. Just to remind, there's about over 400,000 head and neck lymphedema patients or survivors in the United States. Evidence points to about 90% of them have or will develop lymphedema. The study that we just completed enrollment on 235 patients, which is about 10x as big as the pilot study we did a few years ago with really compelling results. We knew that a bigger N was likely going to be necessary to persuade the right audiences. And when you talk about who's the end market for this data, it's really threefold. Certainly, the first one is the payer. We want to make sure that we're demonstrating the kind of evidence that we think that a study like this can that make sure that availability for patients becomes more readily accessible. We think that compelling outcomes should also influence HCPs, and the ability to ensure that they're screening for lymphedema and treating it when presented is an important step, where it's not necessarily commonplace and an awful lot of practices, even in some really well regarded cancer facilities. And then certainly, I think the patient awareness can benefit from this one as well. I think from a contribution standpoint, there's a 6-month follow-up after the last patient in, which was just about the end of April. So we have to go ahead and fulfill that period, and then we can start to see the data assembled and turned into some kind of a manuscript that can be made publicly available and either presented and/or published. It's probably a back half 2025 contributor, but we ultimately believe that this one will have a material impact, I think, on our business. And I think the last part of your question is a particularly encouraging one. While sometimes rising tides lift all boats, this is one that we think we'll particularly benefit from because we actually shared a year or so ago we got some new IP issued that really ring-fenced that part of the body. So any compression, pneumatic or otherwise, that treats the head and neck region of the body, we feel like we've really got that space protected. So this was an investment in helping more patients but also one that we think we will uniquely benefit from.

Our next question comes from the line of Margaret Kaczor with William Blair.

I guess just to start, it's partly a guidance question, partly a growth outlook question. But how do you get to the high end, low end of the guide? And I want to focus maybe a little bit more on lymphedema. How should we think about the cadence of impact for the new sales reps that you hired? Obviously, not a huge impact this quarter, maybe not huge next quarter. But as we get towards the second half of the year, is that the right timing or further out? And just in general, as we think about the catalyst for lymphedema, how does this get to be that sustainable low double-digit plus growth? I don't know if you can point to touchpoints to clinicians, what's the relative number of that 3,000 new products, et cetera. Just trying to frame that up a little bit.

Thanks for the question. We outlined several drivers of growth, and we were pleased that we made good progress. And all of them will be drivers that will build sales over time. It's not an overnight large increase. But again, just to reiterate them, our sales reps, we did add some -- actually, in Q4, we started hiring. A larger chunk in Q1. We'll plan to add a little bit more in half 2 with the plan of those coming to maybe hit their full stride in half 2 as the year progresses. We are making continued progress in transitioning our in-home demos to our trainers, and that is giving additional bandwidth to our sales reps. Our technology road map is well underway. As Dan talked about, we are -- we've piloted an e-prescribing tool. We will be launching a CRM later in the year, all things that, again, will start to help build momentum as the year progresses. And then I know you want to mainly focus on lymphedema but also AffloVest, as we've been talking about, we expect the recovery in that business in the back half of the year as well.

And I'm going to push the second time on the question. And again, maybe just my more simplistic mindset. But if you're growing your sales reps 9%, and realistically, I would assume revenue growth should grow at least 9%, especially as you highlight these time efficiencies and other efficiencies within the system to try to accelerate that more. So am I understanding that correctly and that's kind of how you bridge to that double-digit growth?

Yes. I think that's right, Margaret. I mean when you think about the fact that, yes, we're adding reps, but we know that typically it takes a couple of quarters for their productivity to kick in once they get fully trained. So it's really a back half kind of contribution item. And then the productivity piece that we really benefited from last year, which was starting to get the patient trainers to take some of these in-home demos, our goal is to actually continue to expand that in the back half, which should give us some additional productivity gains on top of a bigger head count. And I think we know we had the toughest comp in Q1. So yes, I think if you look at the guidance that we reaffirmed, clearly, we're going to have to do better in the back half. So all of those assumptions are embedded in that.

Okay. That's helpful. Best of luck in retirement. I think we're all jealous on the call here for your future. Maybe just last one. As we look at the adjusted EBITDA guide, that remained unchanged despite what seemed like a great quarter. You've increased your guidance a little bit in gross margin. You clearly outlined a variety of drivers to see margin expansion. So I'm just trying to get a sense. Is that conservatism? Are you spending some of that upside on other OpEx items as you think about guidance throughout the year?

Yes. So firstly, I think it's still early in the year. So kind of the rationale for not changing the adjusted EBITDA guidance. But I think also, as we think back to our last call, we talked a lot about this being an investment year, and that continues to prove true. And we do continue to expect to see leverage and productivity, but we will be reinvesting some of that savings to help fund our technology road map as well as the additional hires that we made in this first half.

Our next question comes from the line of Suraj Kalia with Oppenheimer & Co.

Dan, Elaine, can you hear me all right?

We can.

Perfect. First and foremost, Dan, it's been a pleasure working with you all these years. Wish you are very healthy and enjoyable retirement. Dan, just following up on the head and neck line of questioning. So if memory serves me right, in the pilot study, patients are required twice a day to use a pneumatic compression. I guess is the protocol the same in the pivotal study? And also, if I could follow up on a subpart of this question. There are different measures for inflammation and swelling, I believe, at CT, digital photography and grading and endoscopy and whatnot. Can you help us understand that? How do you reconcile a difference between readings for the same patient using 2 different methodologies?

Yes. I think that -- so first of all, it's not the exact same protocols as the pilot study. But what we saw in the pilot study was encouraging enough that we thought that this was a responsible investment and one that the market needed, which is a bigger N on some of the evidence available and using pneumatic compression to treat this part of the body. Quality of life characteristics are certainly part of that. There's also some changes in skin swelling, et cetera. But all of those would be part of some of the outcome metrics that the study is evaluating.

Got it. Okay. In terms of the next-gen Flexitouch, Dan, can you give us a sneak peek in terms of the upgrades? Is it more just in terms of form factor? Or are you thinking about changing the algorithm per se, i.e., the time duration for a pneumatic compression, maybe higher pressure? Just kind of what the next gen -- how should we think about the next-gen system later this year and going into next year.

Yes. Sure, Suraj. First, it's not necessarily a next-gen Flexitouch. What we said is a next-gen pneumatic compression device. And the attributes that we've been focused on are trying to make this a much more patient-friendly experience. We know this is a lifestyle that the patient has to follow. They're using and depending on this therapy literally daily for the most part for life. And we want to make sure that it integrates more seamlessly. So there's what I would call a host of consumer-friendly attributes. We're being a little bit cautious about some of the details until the product is closer to launch. But yes, I think that the components that we've assembled, we're quite enthusiastic about what kind of reception we can get from our customers.

Fair enough. And Dan, final question from my side. In terms of -- I think I heard in the prepared remarks the home training gone from 30% to 35% by the trainers, leaving the sales guys more bandwidth. Obviously, VA and commercial saw pretty nice growth. What kind of a correlation should we think about quantitatively between bandwidth being freed up over time for the existing 250 or so sales reps in the lymphedema part of the business?

Sure, Suraj. Good question. Remember, last year, we grew 14% in lymphedema, and we didn't raise headcount at all. And I think that that's really indicative of the kind of expanded productivity that giving the sales force more selling time is capable of. We were up to 35% with our patient education coordinators in the first quarter, and our goal is to continue to expand that. Ideally, I'd like to see us get to 50% by the back part of the year. And ultimately, that should continue to free up our sales force from all of the home visits that they're doing and spend more time in high-volume clinics that see a high velocity, the kind of patients that we can help. So I think those are kind of the key pieces. And the other thing I would add is that we have not had to add as many patient trainers to expand this capacity because one of the things that we've seen is the patient trainers tend to do a really comprehensive demonstration that has led to fewer in-home trainings after the device has been shipped to the patient. So keep in mind, there's a presales demo that we're obligated to do for Medicare patients. And then there's a post-sales training, most -- or not most but certainly more of our patients are finding themselves capable of using their therapy right out of the box with the quick start guide and the available online tools, having gotten a really comprehensive demo. So if you've got a trainer that now doesn't have to do that post sales training because they just did a really good job on the presales demo, it certainly continues to allow us expanded capacity from within that existing group as well.

Our next question comes from the line of Ryan Zimmerman with BTIG.

Dan, congrats on your retirement. Take a lot of pictures of the grandkids. I want to talk about long-term margin targets. They're long-term targets really. I know we have Sheri coming in, but I think one of the things that investors are probably going to be concerned about is just the commitment to these long-term targets that you guys established late last year. And so I know you're staying on the Board and you're involved. Maybe you could just kind of opine on what the thought process is right now with obvious the caveat that Sheri is coming in this year.

Sure. So I think they're, to some extent, apples and oranges, right? Mine's a personal decision. And I think that as it relates to targets beyond 2024, I think the first one is I know when Sheri gets into the seat, she's going to be very focused on the same thing I am, which is delivering on our 2024 plan. So that's kind of project #1. I think as far as 2025, we will clearly be providing guidance at the end of 2024 as we usually do in our normal cadence. But as far as the long-term targets are concerned, we established them in '22, not in '23. And we did it in the fall of 2022 with a particular intention, which is we were emerging from COVID, and we wanted to make sure that we extended an expectation of ourselves beyond just 2023 that said, what do we expect within a normalized environment? We typically, I think, historically hadn't given long-term targets. The company had typically been on an annual cadence. But as I said, emerging from COVID, I think to your point, folks were curious about, okay, is this what 2023 looks like? Or is this indicative of what we should expect on a longer-term basis? And what we laid out was a top line growth rate in the teens. We said we wanted to continue to expand our operating margins and demonstrate stronger cash conversion. And I think just in that framework, those are really still very good, sustainable targets for ourselves. So I know Sheri will be looking forward to providing '25 guidance when we get a little deeper into 2024. But I think that we still think those are good sustainable targets for ourselves.

Okay. Very helpful. And then the other big question is around, I think, margins. Your gross margins are up slightly this year, Elaine, as you alluded to. You do have -- you just talked about some of the features of this new system that's coming. What -- where do you see opportunity to improve your gross margins maybe on a longer-term basis? Because I think that's certainly important to drive some of the expansion in EBITDA margin.

Yes. So I think maybe kind of 2 parts of the question here. We did see improvements in gross margin this quarter, largely due to achieving scale in some of our new products and just good work that our manufacturing team is doing in lowering COGS. We do expect to continue to see some of those drivers come into play for the remainder of the year, which is why we took up our outlook to a growth of slightly above from a year-over-year perspective. I think longer term, we've always talked about gross margins not a place we expected to see being the big growth driver of adjusted EBITDA expansion. Rather, it was continue to get operating expense leverage. And while this year our leverage will be relatively modest given it's a heavy investment year for us, longer term, these investments are going to allow us to continue to get productivity in our sales force and our back office. And really, that will be the driver of the adjusted EBITDA operating margin growth going forward.

Yes. I would just add, Ryan, that even the deployment on the pilot basis so far, this e-prescribing platform is one of the really consequential pieces that we think will have an impact on our operating model. The more efficient we can create a process where we collect patient data from the HCP, the easier we can make it on them, and the more efficient we can process that order when it comes in. Those are material contributors to operating expense reduction. I know we talk a lot about productivity gains within the sales force, but we have a material portion of our organization that sits in the back office and processes claims on the administrative side. And I think the tech investments that Elaine is talking about have always been designed to be the drivers of expanding operating margins. So those are some of the other pieces, I think, that will certainly play into it.

Thank you. We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.