Welcome, ladies and gentlemen, to the Second Quarter 2025 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, 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; Elaine Birkemeyer, Chief Financial Officer. 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. 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 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 Sheri.

Thanks, Sam. Good afternoon, everyone, and welcome to our second quarter 2025 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. We delivered a strong performance this quarter, marked by total revenue growth of 7.8% year-over-year to $78.9 million, ahead of our previously stated Q2 expectations. By business line, lymphedema revenue increased 2% year-over-year to $66 million and airway clearance revenue increased 51.6% year-over-year to $12.9 million. Q2 gross margins increased 60 basis points year-over-year to 74.5%. On the bottom line, adjusted EBITDA of $7.7 million was down 15% year-over-year as expected due to our planned technology and sales headcount investments. From a balance sheet perspective, we ended Q2 with $81.5 million after accounting for additional stock buyback under our recently completed stock repurchase program. We have moved past the early disruptive stages of our Q1 CRM implementation and sales force rebalance and optimization plan. Our growth and leverage strategies are in their execution phase, and we are increasingly confident in our ability to drive consistently improving results. Elaine will elaborate on our full second quarter results as well as provide an update on our financial guidance for 2025. I will focus the rest of my remarks on a review of our individual business line performance and share progress on our key 2025 strategic priorities, improving access to care, expanding treatment options for lymphedema patients and enhancing the lifetime patient value. Beginning with the Q2 review of our lymphedema business line. Lymphedema revenue grew 2% year-over-year and over 30% sequentially. Our performance reflects focused execution of our go-to-market commercial strategy and including strong adoption of Nimbl. From a field perspective, our Q1 sales force rebalance and optimization process provided us with a strategic investment road map for the right roles in the right geographic locations to meet…

Thanks, Sheri. Unless noted otherwise, all references to second quarter financial results are on a GAAP and year-over-year basis. Total revenue in the second quarter increased by $5.7 million or 7.8% to $78.9 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch, Entre and Nimbl systems, increased $1.3 million or 2% to $66 million. And sales of our airway clearance products, which includes our AffloVest system, increased $4.4 million or 52% to $12.9 million. Continuing down the P&L. Gross margin was 74.5% of revenue compared to 73.9% in the second quarter of 2024. The increase in gross margin was attributable primarily to lower manufacturing and warranty costs, reflecting enhancements in product design and stronger collections reflected in our revenue. Second quarter operating expenses increased $6.5 million or 13% to $54.7 million. The change in GAAP operating expenses reflected a $1.4 million increase in sales and marketing expenses, a $0.2 million decrease in research and development expenses and a $5.3 million increase in reimbursement, general and administrative expenses, including and primarily driven by strategic technology investments. Operating income decreased $1.8 million or 30% to $4.1 million. Interest income increased $0.1 million or 13% to $0.9 million due to increased cash position. Interest expense decreased $0.1 million or 22% to $0.4 million. Income tax expense decreased $0.5 million or 26% year-over-year to $1.3 million. Net income decreased $1.1 million or 25% to $3.2 million or $0.14 per diluted share compared to $4.3 million or $0.18 per diluted share. Adjusted EBITDA decreased as expected to $7.7 million compared to $9.1 million. With respect to our balance sheet, we had $81.5 million in cash and cash equivalents and $24.8 million of outstanding borrowings at quarter end. This compares to $94.4 million in cash and $26.3 million of outstanding borrowings…

Thank you, Elaine. In sum, we are pleased with our second quarter performance. We delivered on our Q2 expectations across the P&L for lymphedema and airway clearance, reflecting solid execution in both business lines. We have moved past the early disruption from our CRM implementation and sales force optimization. As we look ahead to the second half of 2025, we are focused on driving operational and financial performance and are confident in our ability to sustain this momentum and believe our strategic initiatives will position us well ahead into 2026 and beyond. 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.

Yes. This is Kyle Winborne on for Adam. Congrats on a good quarter. I guess maybe to start, if I could just push a little bit on the guidance. I'm seeing that you guys beat Street numbers by about $5 million, but then raised the full year guidance by about $1 million at the midpoint. So I was just kind of curious if you could walk us through some of the components here and maybe why more of the Q2 upside wasn't pushed through for the full year.

Yes. Thanks, Kyle, for joining. This is Sheri. And we were really excited to exceed expectations in Q2, and we took a really thoughtful approach as we thought about the back half of the year. Our Q2 performance gave us the confidence to raise our bottom end of the guidance up by $1 million. The positive momentum that we've had with the sales reps that we brought on actually exceeding our [ $285 million ] target, the stronger CRM adoption and proficiency and this market share growth in Nimbl and AffloVest give us a lot of confidence. And we also know that there are some realities of scaling our commercial organization. So we had some lessons learned with our CRM rollout in Q1, which showed that even when you've made the investment and you have a well-managed plan and implementation, you can still get some short-term disruption. So knowing that we're going to be launching AI tools in the second half, we just thought to be really thoughtful about our approach to all this and hedge a little bit against some short-term variability. But all that being said, we're really excited about the momentum that we have and put forward the very best guidance based on the information that we have, and we expect to deliver on that.

Great. That's helpful. Maybe just on the head and neck data, it was good to hear that still on track for the 6-month data release later this year, and I think I heard Q4 -- early Q4 specifically, if I got that right. And then -- so how quickly do you think that you could get payers on board thereafter? And then kind of what can we expect to see -- when can we expect to see impacts on the P&L?

Sure. Yes, we are really excited about that head and neck data. And again, as I said in my prepared remarks, we've had that 2-month data presented now, it will be in 3 different conferences. And the manuscript submission will go in, in Q4. Obviously, it's very contingent on the journal and how fast they are to actually publishing, but it is our intention to get that in, in early Q4. As it relates to full commercialization, I just want to put a little bit of context around this. I just want to remind you and everyone else that we already have the indication for head and neck. So it's not about a new indication. This really is around coverage and the fact that currently, commercial plans tend to see head and neck lymphedema with PCD as being experimental and investigational. We are already engaging in conversations with our commercial payers. And they understand and have more awareness now that their policies may not reflect what is now we're going to be able to show more of a standard of care being able to use pumps, but that does take time. They have to review their policies. They typically have a cadence of where they update policies that is not our time lines, but it will be their time lines. But it will certainly help to have the manuscript. It helps to have the posters and the abstracts. And we know that 90% of patients with head and neck cancer are going to have lymphedema. So the fact that this is a patient population that is likely going to be at risk and getting on to earlier therapy is going to be better. So it will take some time. We're driving as much as we can right now, and we've definitely had some inroads with the commercial payers. As it relates to Medicare, the NCD does allow a path for patients with unique characteristics, which is things like having lymphedema in the head and neck area to go directly to a pump. And so we are engaging and continue to have conversations with the MACs about this and are looking forward to seeing that expanded patient population have better coverage. And so we expect this to continue to move forward in 2025, but probably have a bigger impact in 2026 and beyond, obviously.

Our next question comes from Ryan Zimmerman with BTIG.

Congrats on the quarter. Sheri, I want to ask, you gave some good stats, I think, on the market. And you talked about 145,000 patients, I think, being treated. I'm curious if you can kind of give us your thoughts on where you think your share estimate is there. I put it at about 1/3 maybe of that market. But given the market is growing at 10%, as you said, given where your lymphedema business has been growing, I'm curious kind of how to reconcile that with the plans to kind of get back to that market growth rate over time? And do you think that, that 10% is kind of the right long-term growth rate to think of for Tactile over the long term?

Yes. Thanks for your question, Ryan. We definitely believe that Tactile can return to double-digit growth, and we're headed that way. When I think about the drivers, I want to break them down into market, as you mentioned, market share product mix, which is closely tied to channel strategy and then kind of streamlining the back office. So for market, the lymphedema market continues to expand and the number of patients treated with both PCDs and non-pneumatic compression devices appears to be growing at a 10% CAGR, and we expect this momentum to continue. Less than 10% of diagnosed lymphedema patients get treatment at all. So as a market leader, we are well positioned to influence this through clinical education, patient engagement tools like Kylee, et cetera. So nothing has changed in that market fundamentals, and we think it's going to continue to grow, and we're going to be able to get into that with both diagnosed patients on the short term and undiagnosed over the longer term, move them into undiagnosed to diagnosed. From a market share and product mix, so we don't report out specifically on our share by product. But we do know that growing this business to double digit will require deep market penetration into both product categories. What we do know is that the basic pump or for us, Nimbl is growing faster than that total market CAGR. So we are outperforming the market CAGR with Nimbl. And that has been great for us and will continue to be really good for us. But that growth does have a muted impact on revenue growth relative to unit growth. So as our mix stabilizes and we're no longer lapping the shifting portfolio, we expect the revenue growth to more closely mirror unit growth as represented by the CAGR.

That's helpful, Sheri. And just to push on that, when do you think you lap? I mean, you launched Nimbl, I think, maybe late last year, if I'm not mistaken. So is it fair to assume that by the end of this year, that's when you start to lap that?

So Nimbl launched lower extremity in late last year -- or sorry, upper extremity late last year, launched lower extremity in February of this year. So we're not even in a full year of having full Nimbl, if you will. But what we have done is we've got Entre Plus as well as Nimbl in that basic category and have been seeing that overall growing over time from that basic pump growth. We've been innovating in this area. We brought e-prescribing in this area. And so we've been putting a lot of focus in that basic pump growth area. As well as if I think about channel strategy for a minute, new reps coming in, it's easier to sell Nimbl and e-prescribing than it is to walk into an oncology suite. And so the vascular channel for us is a really nice fit with Nimbl and a nice fit with e-prescribing. But those reps as they get more comfortable on their learning curve, they'll be in all channels. So as that rep starts to season and we are able to execute our channel strategies, again, we think that, that's going to have a big impact on more of this balanced portfolio between Nimbl and Entre -- sorry, our basic pumps as well as our advanced pumps. And that, again, will reflect more of the market.

Yes. And Ryan, I think specific, I know you're getting to kind of a timing. I think you know that this has been a several year journey for us to really make a concerted effort to penetrate that basic pump space, which is why our growth has really accelerated there. Before the Entre Plus, we now have the Nimbl, we have [ Flexitouch ]. And so I think what we're seeing is that while we're starting to see kind of really good traction, hence, now our product mix more closely representing the industry, that's why we said we're not quite there yet, but we're getting closer to that. We'll be able to share a bit more on timing as we get into early next year here full 2026. But we wanted to at least kind of provide sort of that dynamic as to why temporarily our revenue growth has not quite matched the industry growth there.

Our next question comes from [ Brian Vasquez ] with William Blair.

I wanted to focus first -- excuse me, on the composition of the guidance and the updated guidance. I think previously, lymphedema sales were a little bit higher and airway clearance was a little bit lower. And the positive here is, obviously, those 2 could offset each other, but maybe spend a minute on what's going a little bit slower in the lymphedema side and what's going really well on the airway clearance side to kind of switch the mix a little bit and increase the guidance a little.

Sure. So let me start with [ Afflo ] because it's such a great story. And I think -- but it may be a bit repetitive of everything that we said in Q1 because Afflo really does reflect execution of our strategy. We have the partnerships -- secured partnerships with the top 10 respiratory DMEs. This involves a preferred product placement for several of those top DMEs. We have full alignment with their finance team. So they're planning on the product volume, which, of course, resides on their respective balance sheets given that this product has a 13-month cap rental. And we're also seeing increased demand. So this -- the 1,200 clinical education events that we've done, along with just increasing awareness in the space is just driving up demand, and we're really pleased to have a great product -- the only product that's truly mobile as is battery-powered versus tethered is also the light weight product. And these are differentiating features for both providers and for patients. So doing everything that we said we were going to do. We have a great product. We are educating and then we've got these great secured partnerships, and this is going to continue through 2025.

And when it comes to the lymphedema, similar to what was shared with Ryan, where we're seeing a disproportionate -- we're seeing just a different unit mix from our basic pumps to our advanced pumps. So Nimbl is growing faster than the market and it is growing faster than Flexitouch. But the assigned revenue for basic versus advanced pump is different. So that is really what you're seeing us in terms of as a percentage growth of revenue, and that's really what's contributing to it. But we feel very confident with our strategies, our commercial strategies, which is both channel as well as go-to-market with our sales reps and putting the right reps, looking at the right support systems around that, we're feeling very confident that we'll continue to take advantage of the growing market, continue to grow market share and then ultimately have our revenue reflect what is truly the product mix that is -- that you see in the CAGR on behalf of the broader market.

Okay. And then one of the other kind of more positive updates, I think you had made a comment about some of the unique characteristic requirements for reimbursement coming through a little more positive and -- or at least you've come away more positive on those developments. Maybe talk about what you are seeing in the underlying business, especially around that reimbursement update that is leaving you a little bit more comfortable.

Sure. And I'll share this with Elaine. We said that -- and I believe we said this in our Q1 earnings call, maybe even in Q4, that the move from LCD to NCD was a great move for patients because what it does is it eliminates that need for a patient to have to go through a basic pump trial before they get to an advanced pump trial. And if I go back to head and neck, let's think about that for a Medicare patient. A Medicare patient would have had to have a basic pump that did not even cover their head and neck starting place before they could get to an advanced pump. And unique characteristics allows for a patient to have documentation that shows that they have edema outside of the limb, so think about chest, trunk, head and neck as well as potentially skin changes. So it could be fibrosis or it could be hyperpigmentation or a number of things. And so that being part of the NCD unique characteristics, there is now a path for patients to move into an advanced pump if they meet the clinical requirements. In terms of what we're seeing, I'll turn that over to Elaine to give a little bit more real-time color.

Yes. I think to tag on to what Sheri is saying, I think what we're excited about is it's really becoming clear to us that the pivotal policy is really meant to make sure patients get the right product for their clinical indication the first time. And there's no longer this kind of [ DD ] pathway that's needed against for these Medicare patients. And so -- and it also -- it's really complementary to our strategy. We've been really focused on ensuring we've got that basic pump penetration so we can serve those patients well that really just have lymphedema can find to their limbs and then really that other more distinct group who have more complex cases where the lymphedema is extending to parts of their body like their chest, trunk or they've got their skin conditions with our Flexitouch. So we've got 2 great products, and we now have really good strong foothold in kind of both their segments. So we feel like we're well positioned to take advantage of this NCD approach of ensuring the right patient gets the right product.

Moving next to Suraj Kalia with Oppenheimer.

This is [ Seamus ] on for Suraj. Congrats on the nice quarter. Just looking at revenue by channel, I noticed a little bit of continued weakness on the commercial side. Just kind of wondering what's going on there? What are you seeing kind of is there something changing for either the positive or negative? Just wondering what you could call out there.

Sure. Thanks, Seamus. I just want to kind of reminder that when we talk about channel, we're really talking about call points because that's where our reps focus. They don't focus on payer type. But there is a relationship by channel that then has a certain product mix, which then has a certain type of payer mix. But I just want to -- for clarification, when we talk about channel, we're really talking about call points. So certainly, what you see from a payer mix standpoint that commercial payer mix is a little bit lower versus prior year. Medicare is up versus prior year. VA is about the same from prior year. And what you're really seeing here are several things. But one in particular is that we had -- specifically to Medicare, we had several quarters of depressed Medicare shipments last year. If you remember, because of the documentation requirement, things were changing. And so that was impacted, and we're seeing some upside of that, but it really is product more of the policy than any change in the actual population itself.

Okay. Got it. I appreciate that. Just one other from our end. We saw -- you guys completed the share buyback this quarter, saw that you paid off the term loan. Just kind of more broadly, how should we think of use of cash, deployment of capital kind of in the back half and kind of going forward here?

Yes. No, we're excited to be in the position where we are where we were able to exhaust our share buyback, and we continue to sit on capital and growing capital. So as we've shared in other meetings, we continue to look at opportunities that are strategically aligned with our business to really determine best use of capital for shareholder returns. We'll continue to look at that and again, continue to enjoy a very durable cash balance that will continue to grow over time.

[Operator Instructions] And our next question comes from Anderson Schock with B. Riley Securities.

Congrats on the strong quarter. So you had a really impressive quarter for sales of AffloVest. Could you just talk about what's driving this? And then also any trends you're seeing on bronchiectasis diagnosis growth? And what percent of patients are then being prescribed to airway clearance devices?

Yes. Thanks, Anderson. Yes, we definitely are really pleased with that growth. And I would say similar to what I said earlier, this really, we believe, is a product. We kind of talk about it as all the stars aligned. So while last year, we had some -- we had advanced secured partnerships, we didn't always have the financial alignment, i.e., the CFOs and those DMEs didn't necessarily plan for the demand of products sitting on their balance sheet. And so not only were we able to advance the secured partnerships and solidify that with appropriate and preferred product placement, but we also were able to secure that partnership and alignment with the CFOs on the DMEs. And we were -- we saw Q1, and we wanted to make sure that it would be sticky, but nothing gives us any reason to believe that we won't finish the year really strong with this continuation of partnership. Certainly, there's been more awareness of bronchiectasis. As I shared, we've educated 1,200, not just clinicians, but also we're educating the DME sales teams, their order teams, their clinical teams. So those individuals are getting a lot more awareness of the disease and how do you help identify patients that might have bronchiectasis and get them through the appropriate screening for all of that. And so we continue to kind of take advantage of that and believe we're in a very strong position to lap the Vest. Baxter right now is #1, and we're very close to that and really pleased with the strong demand. I can't comment specifically on what the share has looked like or the growth in Vest simply because the lagging data that's available to even look at what those claims look like. I wouldn't have anything current because everything is about a year lagging, but we're definitely really pleased with the demand that we're seeing, and we're able to meet the demand that has been really exponential as you see in our P&L.

Okay. Got it. That's very helpful. And then you mentioned the disruption of the new CRM system is behind you now. How should we think about productivity going forward as you continue to expand the sales force and implement some of these new AI sales tools?

Yes. So I would say when we talk about productivity, has been with our sales go-to-market kind of strategy, we were very intentional and we talked about it in Q1, saying we were investing both in making sure that we had kind of the right FTE in the right geography. And that's why we had our Q1 temporary pause in backfilling roles. And so we could actually look at placing right kind of account manager and then resource that with the product specialists. And the account manager is going to be the one that's driving the clinical engagement and the sales, clinician engagement. And then the specialist primarily is going to be looking at documentation, although they can back up for that account manager as well as help support existing accounts. So we are resourcing, as you saw in our total numbers, and we're going to get to over 300 by the end of the year, this balance between account manager and specialists. And when we put those together, along with how we're thinking about our PECs, we will essentially have a fully resourced territory. So we now are looking at productivity as referrals per territory. And that would look like everyone I talk about top of license. So the rep is selling, the specialist is helping to support. The PEC is there helping to take patient engagement workload off of the rep. And that's how we're measuring and we're looking at how is that referral per territory increasing over time, and it is. And we have a target on what that needs to look like. Of course, there's a ramp with new reps coming on. But that's how we're measuring productivity. When we look at CRM productivity, we've moved beyond what is people logging on and updating some data.…

Yes. Very clear. Congrats again on the quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.