Please standby. Welcome, ladies and gentlemen, to the Fourth Quarter and Fiscal Year 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 Bentzinger, Investor Relations at 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 Sheri Dodd, Chief Executive Officer; and Elaine Birkemeyer, Chief Financial Officer. Before we begin, I'd 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. These 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 as 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 Sherri.

Thanks, Sam. Good afternoon, everyone, and welcome to our fourth quarter and full year 2024 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. We are pleased to report strong Q4 performance today, capping off a dynamic year for Tactile where we delivered total revenue of $293 million representing a 6.8% growth year-over-year. In Q4, total revenue grew 10.2% year-over-year to $85.6 million. With respect to our Lymphedema business line sales grew 11% year-over-year in the quarter and we were up 18.1% on a sequential basis. Q4 Lymphedema results reflect strong commercial execution encompassing technology and workflow related investments including growing adoption of our e-prescribing offering, the accelerated implementation of select tools from our new CRM and reallocation of select back-office resources to support the increased field burden of non-selling administrative activities. We also continue to see the benefits of our 2024 Channel Diversification strategy with double-digit growth in the VA, Commercial and Medicare. Further, we launched Nimbl, our next-generation basic Lymphedema PCD offering in early October and we are pleased with how both clinicians and patients embrace the new platform for upper extremity symptoms. Our confidence continues to grow with the recent expansion of Nimbl for lower extremity symptoms as well. In Airway Clearance, sales of AffloVest were up 3.8% year-over-year and 8.8% sequentially. We continue to see value in our AffloVest product as a proven patient friendly and differentiated therapy offering that is clinically advantageous in the growing bronchiectasis market. Coupled with an Airway Clearance sales organization that is highly tenured with deep product and disease knowledge, we believe we are well positioned to compete in this space as the number two market share leader. We are focused on fortifying relationships with each of our top DME partners and penetrating further within these accounts to…

Thanks, Sheri. Unless noted otherwise, all references to fourth quarter financial results are on a GAAP and year-over-year basis. Total revenue in the fourth quarter increased $7.9 million or 10.2% to $85.6 million. By product line, sales and rentals of Lymphedema products, which includes our Flexitouch and Entre systems increased $7.6 million or 11% to $77.1 million and sales of our Airway Clearance products, which includes our AffloVest system increased $0.3 million or 3.8% to $8.5 million. Continuing down the P&L. Gross margin was 75.2% of revenue compared to 72.1% of revenue in the fourth quarter of 2023. The increase in gross margin was attributable primarily to lower manufacturing and warranty costs, a testament to improvements in product design and improving collections reflected in our revenue. Fourth quarter operating expenses increased $7.6 million or 17.3% to $51.9 million. The change in GAAP operating expenses reflected a $2.6 million increase in sales and marketing expenses, a $0.2 million increase in research and development expenses and a $4.8 million increase in reimbursement, general and administrative expenses, including and primarily driven by strategic technology investments. Operating income increased $0.7 million or 6.1% to $12.5 million. Interest income increased $0.1 million or 10% to $0.9 million due to an increased cash position. Interest expense decreased $0.4 million or 47.4% to $0.5 million primarily driven by the retirement of a revolving line of credit at the end of 2023. Income tax expense decreased $0.3 million or 8.1% year-over-year to $3.3 million. Net income increased $1.5 million or 18.3% to $9.7 million or $0.40 per diluted share compared to $8.2 million or $0.35 per diluted share. Adjusted EBITDA increased $16.2 million or 18.9% of sales compared to $15.4 million or 19.8% of sales. With respect to our balance sheet, we had another solid year of cash…

Thanks, Elaine. In closing, we're pleased with our financial results and the progress made in 2024 against our operational and commercial priorities. This performance enabled us to serve almost 80,000 patients last year and we look forward to serving even more in 2025 through our new growth strategies. Finally before concluding my remarks, I'd also like to thank our employees for their collective efforts this past year. None of what we achieved would have been possible without them. Thanks as well to our customers and investors for their continued support. With that, operator, we'll now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.

Hi, everybody. It's Max on for Margaret. Thanks for taking the question. I just wanted to start on the '25 sales guide. There's a lot of moving parts with Nimbl, e-prescribing tools, the NCD, maybe a next-gen AffloVest. So I just wanted to understand how you guys came up with the 8% to 10% for the guide and what makes you confident you can see growth accelerate to 8% to 10% versus the 7% this year? Thanks.

Sure. Hi, Max. Thank you. When we put together the guidance for 2025, we definitely did take into account the continued modernization that we started in 2024. So we're starting already this year, having launched the CRM actually just about two weeks ago, 1.5 week ago. So having that new CRM tool is going to be very beneficial for our sales force overall efficiency, effectiveness, et cetera. We are excited about the launch of Nimbl. We just released the lower leg extremity launch here also in the beginning of February. So we'll have a full system that we're launching into 2025. And we know already that, that system has been highly appreciated by both patients and physicians in that area. And we also are just continuing to see our ability to generate the back-office support. So whether that's the right resources in the right place, as well as the e-prescribing tool, just reduce the friction that's currently out there in the collection of documentation. And then two other points I'll say. One is then on the policy landscape. So as we shared in the script, there's been a lot of changes that have happened between the LCD and the NCD. And when we announced this in this change at our last earnings calls, we still didn't have a good understanding about how the MACs would be adjudicating the NCD. We have a lot better understanding now. We've had both training, as well as engagement with the MACs. And as I shared on the script, we're feeling that there's going to be opportunity for patients who could benefit from an advanced pump. We'll have a more streamlined way to get there. We're still being conservative in our guidance here because we'll need to see what's written on paper versus how the MACs actually adjudicate. But we're feeling very positive it was the right decision for patients and for our business. And then you mentioned on AffloVest, we do not have a product launch in 2025. But what we do have now is we'll have a full year of being under contract with the top 10 DMEs, where that was not the case last year. So I'm looking forward to seeing the growth both in Lymphedema as well as in the AffloVest pick up for 2025 until we have the right strategies behind that.

Great. Thanks. And just a follow-up, if I may. On the e-prescribing tool, you guys piloted that throughout 2024 and rolled it out in October. Can you just give us some color on how that progresses throughout '25, maybe a ballpark percentage of how many accounts are currently using it? Are you seeing quick adopters or should we think of that more as like a steady uptick?

You know what, we were really pleased to have piloted with multiple generations through majority of 2024 to fine-tune that tool. So it was easy for physicians to use and it reflected the appropriate documentation for our providers. And when we launched in October nationally, our reps were really happy to have that in their hands so that they could go and talk to prescribers. So we're going to continue to focus on that. We're not sharing a target in terms of the number. There's certainly going to be some physicians that are going to adopt parachute, some that aren't potentially going to adopt parachute. And we'll not just hanging our entire efficiency on parachute. We'll be looking at other tools, AI tools, et cetera, that help with that more efficient way of collecting the appropriate documentation. So there'll be something for everyone on the physicians, even those that don't want to adopt parachute.

Great. Thanks for taking the question.

Yes, I appreciate it. Thanks, Max.

Thank you. Our next question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Hi, Sheri, Elaine. Good afternoon and congrats on the finish of the year. Thanks for taking my questions. I wanted to start with one on guidance and specifically adjusted EBITDA guidance, which I believe is flat to down a couple million bucks. You've driven really good leverage in past years. So I guess the question is, why is 2025 different? And I heard some of the comments in the prepared remarks around investments, focused on access to care, specialist headcount growth, but still trying to get, I guess, my arms around the guide a little bit more and just wanted to flesh that out. And then, as we look to 2026, should we expect adjusted EBITDA to grow and move in the right direction again? And then I had a follow-up. Thanks.

Yes. Thanks, Adam, for the question. So I'll have Elaine weigh in on this as well. There's been a really nice history with Tactile of improving EBITDA for years, right? So the business has gone from that focus on profitability and collections and has continued to show really nice gross margins as well as everything dropping to the bottom line on EBITDA. Where we're at right now, as I shared on this growth strategy, we need to make and continue to make the right investments. That's going to be both in people and we talked about the role that our field team has, not just in selling, which is going to be that account manager tool, management people, but also the specialists, that collection, the documentation. That's more on the DME side, if you will, of our business. So we have a need to be investing in both the sales work as well as the documentation collection. Some of that can be leveraged from tools, some of it can be leveraged by back-office support and some of it is going to be by adding the appropriate headcount in the field. So investments that we're making is both in headcount from the specialist standpoint to make sure that we can collect that documentation quickly and move the patient through that order process quickly. So we don't have leakage of patients and we have the best possible experience. And then the investments will continue to be in modernizing our technology. So next phases of CRM, which will bring us into cloud-based services, et cetera, is all in our pipeline for this year. Anything else, Elaine, to add?

No, I would just say, I think the EBITDA guide was a conscious decision that this was really the right time for us to make these investments in the organization. I think, as Sheri mentioned, we spent the last couple of years is really bolstering both our P&L and balance sheet. And all the investments we're making are really going to help us have sustained long-term top line growth as well as profit growth. And so everything that we're doing is kind of aimed at both and we thought that both our cash flow and kind of where we've been and profitability affords us to be able to make those investments this year.

I got it. That's really helpful color. Thank you for all that. And for the follow-up, I guess, kind of a two-parter here, if I may. So I guess, one, just as we think about kind of quarterly cadence for 2025, we just love incremental color that you're willing to give there, both from a top line and adjusted EBITDA standpoint, as we think about our models? And then as it relates to the head and neck opportunity, are you contemplating anything from head and neck into the back half of 2025 in the guide or should we really view that as a potential upside lever? Thank you.

Sure. I'll start with the head and neck piece. So as I mentioned, really pleased to have be in the position now where patients have been enrolled, all the follow-up has taken place, locked down the database. We've submitted the two-month data into conferences for presentation. But the most important data is really going to be that six-month data for us. The six-month data is what the CMS had asked for in terms of what was going to be important and basically a criteria to help support two aspects of reimbursement, one is coding, and the other is coverage. And so with that data and as soon as those six month study has results, they still need to get presented, both in publication and/or in conferences. So we were conservative in baking in any head and neck upside just because the timing of when that conference and acceptance could be slightly varied. But again, we're super excited about this as a benefit for us. I mentioned the IP moat we have around this. I mentioned that the 90% of the 400,000 patients with head and neck cancer are going to have Lymphedema and we have a great product for them. So we'll need to work through all that, but I would say that, that is going to be very conservative and it would be in the back half of the fiscal year. From a timing standpoint of everything else, very indicative of what's happened in the past, where not just because of the seasonality of our business in terms of Q4 being a bigger year because of the patient deductibles, but the first part of the year, Q1 tends to be slow for that very reason, because patients haven't yet met their deductible. So we'll have a normal cadence that I think you've seen in previous years, where you will see the revenue be on the trajectory of slower in the first half of the year and then ramping up in the back half.

Yes. So I think while our sequential growth, I think, as Sheri mentioned, is going to look kind of within the realm of what we've seen historically. In my prepared remarks, I did share that we do expect to see greater growth in the back half versus the first half. I think just to give a little bit more color on that, we did launch our CRM tool, which we're very excited about. However, there is a learning curve there, so we do expect some short-term just growing pains as the team learns that tool with really increasing productivity as they become proficient, which we'll start to see as the year progresses.

Thanks for the color.

Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Hi, Sheri and Elaine. This is Izzy on for Ryan. Thanks for taking the questions. So just to start out, I was curious about the strength of the balance sheet. It's pretty clear that you guys are going to be prioritizing investments back into the business with those priorities that you outlined in the prepared remarks. But I was curious if you could speak to your appetite around inorganic growth, if there's anything that or any opportunities that you see there?

Thanks, Izzy. We definitely are very proud of the balance sheet and where we're at. When I mentioned before, we have this underserved population, you've got an underpenetrated population and then you have a business that is profitable, has strong gross margins, has cash to invest back in the business, as well as, as you know, we did the stock buyback, another great value back to our shareholders where we believe that the stock definitely will be able to move. And then there's still cash on the books that we can use both for investments back in the business as well as for other opportunities. My key point here is that the opportunities that we are currently thinking through would be very strategic investments based on the scope of our business. And so we are not thinking of being a holding company with multiple small companies in this space. So the strategic investments will fall very much in line with the strategies for growth that I laid out, investments that allow us to increase access to care, help support patients through their full care pathway and this lifetime value. So that's where we'll be focused on any of those external inorganic spends.

Helpful. Thank you. And then as we look bigger picture for Tactile, I was just curious if you feel that there's anything that might be underappreciated by The Street in the story right now.

I think that the story that The Street has seen and I appreciate the questions that they've been asking about growth and I think where we're at now in laying out the strategy that the growth and the growth in areas that could be durable and sustainable growth, at the same time, keeping profitability overall, being able to make smart investments back in the business to help serve patients. That is where we are. It's where we're planning to go. I think the health of the balance sheet and the health of the bottom line, if you will, has been kind of appreciated. But what I've heard from The Street is, show me your plans to grow. And I hope that I was able to outline that in talking about the strategic imperatives. We have to develop the market, and we have to do that through educating clinicians and educating patients and we have to do it through having the right reimbursement landscape and we have to do it from having the right technology and innovations and it has to be easy to work with us. We have to be able to do all this quickly. So that is all the things that we're working on and I hope that the strategies that we've laid out will resonate with our Street and our investors and they'll see our path to growth.

Thank you. Our next question comes from the line of Kyle Bauser with B. Riley Securities. Please proceed with your question.

Great. Thanks for taking my questions. Maybe just following up on the guide for EBITDA. So obviously the top line guide of 8% to 10% for sales with 8% to 10% being the Lymphedema business and 6% to 9% for the Airway Clearance. Can you break out the kind of business outlook for profitability for each business as well like you did on the top line? So I think the guide for '25 EBITDA is about 11.2%. How does that look for AffloVest versus Lymphedema? I'll start there.

Hey, Kyle, thanks for the question. We actually don't break out profitability by our product lines. We're a single segment reported business. So the only breakout we have is at that top line.

Okay. Got it. And so the growth of 6% to 9% in the Airway Clearance business would imply share loss, a slight share loss, I think that's growing a little bit slower than the market. Are there since this is kind of a transition year from a profitability standpoint since you're investing in the business, are there ways to kind of invest in the AffloVest business and enhance margins here or have it become more of a meaningful contributor to the overall business?

So I'd say a couple things about Afflo. So Afflo is accretive to our business. I don't know, maybe I misheard you, Kyle, by thinking that it wasn't profitable. So it is and always has been accretive to the business. We play number two in this space with and in a market that is adding more technologies, which we actually think is a positive, because this again is a population that is underdiagnosed and underserved. So more patients becoming aware of bronchiectasis and physicians understanding what bronchiectasis is and knowing that these type of therapies can be beneficial. I think we have the exact right therapy. We have a therapy where it is -- the patient can be mobile. It's not attached. You don't have to plug it into a console. It fits well. The durability is great. The feedback from our patients is really strong in this area. So we have a great product. And as I said this year will be our first year of having a full DME where our, sorry, full contracts with the top 10 DMEs. And even some of those DMEs, we have a priority or preferred placement. So I'm bullish on our ability to get to the growth as we outlined in the guide on AffloVest. Again, based on having a great product, based on having the depth of contracts and breadth of contracts with DMEs, as well as, again, some of these DMEs have a prioritized preference for our product.

Okay. Yes. And I wasn't saying that business wasn't profitable. I was just saying that the top line growth rate implies that it's growing slower than the overall market. So I was just kind of curious about that. But it sounds like you've got some good contracts in place to maybe outperform that potentially. Maybe one last question. On the patient education consultants, I think you finished the year, you said that 52% of in-home demos being done by PECs and that you hope to increase that. Is there a goal for the end of this year to go north of 52%? Thank you.

Yes, we're not going to call out a specific number there. It's very hardwired in. And as we described this role clarity that we're putting in place between the account managers as well as the specialists and the PECs, making sure that we understand, and we do understand, the work and jobs to be done and then making sure that we've got the right territory placement of all of those individuals and that they're working well as a team. So I fully expect that the PECs will be taking on more of the in-home demos. It will be a big part of the overall strategies. And it's also a great opportunity when the PEC is side-by-side with the patient to actually help the patient onboard with Kylee. And again I've mentioned Kylee before. I don't want it to be thought of as just an app. Kylee is really a really unique patient engagement tool. The patient can take photos of their limbs. They can record measurements. They can talk about symptoms. They can track their entire therapy session. So the PECs being close and proximal to those patients in the home will be a great opportunity of onboarding Kylee as part of their whole kind of care package.

Okay, got it. Thanks for taking my questions. Appreciate it.

Thanks, Kyle.

Thank you. [Operator Instructions] Our next question comes from the line of Suraj Kalia with Oppenheimer & Company. Please proceed with your question.

Sheri, Elaine, thank you for taking my questions. So Sheri a couple of questions from my side. The first one, throughout your commentary and even last quarter, you've mentioned and brought up many times the burden of documentation and specifically patient leakage. Sheri, can you put some guideposts around define patient leakage a little more for us, just quantify it to the extent that you can? And also how should we think about leverageability implicit in the model because if you reduce patient leakage?

Yes. Hi, Suraj. Thank you for the question. So when I talk about patient leakage, if you think about the entire journey of a patient, and we've mentioned before, it can take years sometimes for them to get to a diagnosis. They get in kind of a rule-out condition. They finally get a diagnosis, and the physician says, I think you would benefit from a pneumatic compression pump go. Well, the difference between a patient getting a pharmaceutical product was then the patient would go to the pharmacy and pick up a script. On our side, of course, because this is managed through DME, there is the documentation that the physician has to have that's going to meet the payer requirements. So that has to be in the record. And it isn't all the time in the record. So we mentioned before what happened with the LCD interpretation. A patient could have been on conservative therapy for months. But if it hadn't been documented the start date with measurements and then the end date at four weeks with measurement, that patient had to redo that entire episode of care, if you will. And so, patients sometimes said, I'm dropping it like why do I have to do this all over again? I need something else. And then they may drop out. So that would be a potential leakage point. Once the patient does complete all the documentation, we have to qualify their insurance. That insurance could take a while, depending on the benefits. The patient has to be available for us to do the in-home demo. And that has to be done. So there's multiple steps that are part of the DME piece. And the longer that takes and the more protracted that is, there it becomes more chance that the patient will just say, I give up, I'm done, and they drop out. That would be the leakage that I'm talking about. So it is in our interest and the patient's interest to make sure that we're collecting all the information upfront so that patient gets qualified and that we can move through all those processes quickly and with the right information for the patient so that they understand what's happening next, there's great communication all the way through and then they can get onboarded with their product. I hope that's helpful.

Got it. Sheri, one other thing, and I don't believe in your prepared remarks you made any reference to the qui tam. Do we know the latest and greatest on whether the government is going to take it up? I think that there was a date coming for a decision and maybe my memory is failing me. Any update there would be great. Thank you.

Yes. So as you know, this remains an ongoing legal matter, so I can't comment any further than what's in our public filing. And in that filing, we share that we've been served by both relators' counsel and we're working with our counsel on a response. And at this time, the government has not chosen to intervene, which would mean that at the moment, they haven't. They can intervene at any time, which means that they would take over the litigation. But right now they have not chosen to intervene. Regardless of whether they intervene or they don't intervene, we'll defend the matters as they proceed and we're still very early in the process. Thanks, Suraj.

Thank you. And this does -- we have reached the end of the question-and-answer session and this also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.