Good day, and thank you for standing by. Welcome to the Tandem Diabetes Care Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, Executive Vice President and Chief Administrative Officer. Please go ahead.

Hello, and welcome to Tandem's Fourth Quarter and Year-end 2025 Earnings Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, our product pipeline, development time lines 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, which are described in our press release issued earlier today and under the Risk Factors portion of our most recent annual report on Form 10-K. Today's discussion will also include references to both GAAP and non-GAAP financial measures. Please refer to our earnings release issued today and available on the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure and other information regarding our use of non-GAAP financial measures. John Sheridan, Tandem's President and CEO, will be leading today's call, and he'll be joined by Leigh Vosseller, Executive Vice President and Chief Financial Officer. Following their prepared remarks, the operator will open the call up for questions. Thanks in advance for limiting yourself to one question before getting back into the queue. I'll now turn the call over to John.

Thanks, Susan, and welcome, everyone. 2025 was a defining year for Tandem, where we surpassed the milestone of $1 billion in sales while delivering on our mission to provide new innovations, improved outcomes and a revolutionary experience to nearly 0.5 million customers worldwide. Momentum built across the year and culminated in Q4 results where we set multiple records while delivering double-digit growth and improved profitability. Seeing the dedicated efforts and strategic focus of our entire team makes me both proud of what we've accomplished and excited for what lies ahead. In addition to our financial performance, I'm equally proud of our execution against the 3 key initiatives we prioritized at the beginning of the year, which were modernizing our commercial operations, delivering new technology and shaping our business model. Together, these changes are transformational for our company and set a strong foundation for Tandem to drive sustainable growth and profitability in 2026 and beyond. In my prepared remarks today, I'll be speaking to each of these key initiatives, starting with the modernization of our commercial organization, which positions us for strengthened execution worldwide. In the United States, we expanded our sales team and updated our sales processes. We also began implementing new systems during 2025 that will provide significant efficiencies and benefits to our sales team in 2026. In addition, we began expanding our dedicated commercial efforts for people living with type 2 diabetes. Turning to our international business. We delivered a strong performance in 2025, setting record sales once again. This accomplishment is even more impressive as we did so while preparing for direct commercial operations in the U.K., Switzerland and Austria. The transition activities went exceptionally well as our team hired talent in these countries while smoothly coordinating the distributor separations and implementing the necessary back-end infrastructure. As…

Thanks, John. 2025 was a record year for Tandem, which is highlighted by our milestone achievement of more than $1 billion in worldwide sales and multiple records in Q4, including our highest sales, gross margin and pump shipments. In 2025, worldwide sales grew 12%, our second year in a row of double-digit sales growth based on a 10% increase in the U.S. to $707 million and 15% internationally to $308 million. Focusing on the fourth quarter, our record worldwide sales of $290 million represented 15% year-over-year growth. This is the strongest sales quarter in our company's history and is of particular significance as it was achieved during a period of commercial transformation. In the U.S., our Q4 sales increased 14% to $210 million. This growth was driven by more than 27,000 pump shipments, our highest quarterly achievement. Renewals from our loyal customers made up more than half of the shipments and MDI conversions represented approximately 2/3 of customers new to Tandem, consistent with trends across the year. We also benefited from a greater portion of our supply sales through the pharmacy channel. In all, sales through the pharmacy channel nearly doubled from Q3, growing to $16 million or 7% of total U.S. sales this quarter. Only a few percent of our total installed base ordered supplies through pharmacy in Q4, creating a meaningful opportunity as we expand awareness and accessibility for our large existing base of over 300,000 customers. Internationally, we grew 17% year-over-year in the fourth quarter, delivering $80 million in sales and 11,000 pump shipments. This marks our strongest Q4 performance to date, driven by growth in both pump and supply shipments. We also realized benefit from favorable FX, offset by $4 million associated with our transition to direct operations, primarily impacting pump sales. For the full year,…

Thanks, Leigh. As you can see, 2025 was a year full of tremendous accomplishments that position Tandem for increasing success. Our ongoing dedication to innovation and improving our customers' lives continues to motivate us to reach new milestones. I want to thank every member of the Tandem team for your steadfast pursuit of excellence, collaboration and adherence to our shared mission. Your contributions have driven our success and will propel us to another year of meaningful progress, impact and growth. This is an important and exciting time in Tandem's journey. We are well positioned to deliver best-in-class technology to our customers in a more streamlined and cost-effective way while advancing our global business model and creating meaningful long-term value for our shareholders. Thank you, everyone, for joining us today, and I look forward to updating you as the company continues to progress.

[Operator Instructions] Our first question comes from the line of Matt Miksic from Barclays.

Congrats on a really strong finish here, both top line and on the EBITDA line. So I think you're going to get a lot of questions here around the new model. I appreciate all the information in the slide deck, kind of spelling it out and laying it out. And it's certainly not -- it's certainly something that folks have talked about and thought about just in diabetes generally that's moving in this direction, particularly for automated insulin delivery systems. One question, I guess, is you gave pretty good guidance on Q1, which was clear for the full year in the U.S. The OUS growth with the $15 million headwind is sort of like a 9% to 10% underlying -- is the right way to think about that kind of in the mid-teens. And so I guess you have like low double-digit U.S. shipments, mid-teens OUS kind of underlying growth to get to sort of like a low double-digit underlying sort of performance metric for next year, absent the PayGo changes?

I think that's correct, Matt. I think if you look at the overall revenue growth or shipment growth for the year, it's going to be in the line of 10% to 11%. So it's going to be double-digit growth in shipments. And we also expect to see a return to growth in new shipments. I would say that, that is the best indication of our performance next year, including the profitability because when you look at the revenue numbers, the revenue numbers are impacted by the headwinds from the pricing that comes along with PayGo. So this is a very impactful change in the business. We're very excited about it. I think when you look at it, I mean, basically, we double or more than double the revenue, the lifetime revenue from a patient, and that's a substantial change while at the same time, we are going to substantially reduce their out-of-pocket and improve the experience. So that's a real win in both sides. And like I said, we're very excited about this. It's going to be impactful. And I think when you look at the impact on the P&L, I mean, certainly, there's a revenue hit from the pricing headwind. But when you look at the gross margin, you look at adjusted EBITDA, we do show solid performance there. And as I said, shipment growth is the real numbers to look at in 2026 for us.

Our next question comes from the line of Mathew Blackman from TD Cowen.

Great. A lot to chew on a lot to ask. I guess I'll ask the expectation of 20% -- roughly 20% of pumps in 2026 going through the pharmacy. Can you give us some context on where you are from today on a coverage and contracting standpoint and where you'd expect to be exiting the year? Just trying to reconcile the 20% mix versus maybe where you are on the contracting side, what progress you've made there?

Sure. Happy to. So I would say there are 2 ways to think about coverage for us. I mean we do have contracts with all of the major PBMs, the top 3, which gets you about 80% of covered lives under contract. But what we're really focused on is the formulary access where we have roughly 1/3 of lives covered today. And think about that as just the beginning as we're launching into this -- the pharmacy with the pay-as-you-go model, which those contracts will be effective late in the first quarter. So at the very beginning here, I would expect low volume, but it will continue to scale up across the year to average to that 20% point that we -- that you mentioned in terms of pump shipments going out the door with a $0 upfront payment. That's a little bit separate or different from the amount of our installed base that we expect to be ordering through the channel. So think about this as a complement, while we have that headwind on the upfront piece, we have the ability to mitigate some of those headwinds by transitioning or shifting more of our current DME customers into the pharmacy channel. And similarly, that percentage will start low. We came out of the fourth quarter with less than 5% ordering through the pharmacy channel, and we expect that to scale up across the year as well. So on average for the year, you can think about that as roughly 10% of our customers across the year that will be ordering their supplies through the pharmacy channel.

Our next question comes from the line of Larry Biegelsen from Wells Fargo.

Congrats on a nice quarter here and on the bold move here. And as Matt Miksic said upfront, this has been, I guess, talked about for a long time, John, this pay-as-you-go model. So my questions are really why now? Why is this the right time? And the long-term pharmacy goals, why is 80% the right number in 2 to 3 years? I assume that excludes Medicare fee-for-service. And how are you thinking about attrition changing with the pay-as-you-go model?

Well, we have been thinking about this for a while. And I think in the fourth quarter, we gained a lot of experience just in our pharmacy business. We've had conversations with a number of payers. And we think it's very doable. We've been looking at -- we've talked about pharmacy for a while now. And I think it's absolutely the right time to make this transition. We've got a number of other things that are very positive when it comes to the business. So as I said, this is a very impactful decision for us, but it's the right one, and we're very excited about it.

I'll take the question about the goals and your question on attrition. So as we think about the goals, this is just the beginning, and we're working to build up additional formulary access and as well as within the formularies that we have to build up attachment from the downstream payer plans. And so what we see is over the 2 to 3 years is what it will take for us to build up to optimal coverage, if you want to call it that, where at that point, we probably will have at least 70% of our sales going through the pharmacy channel. So that's a complete flip of our business model, obviously, from where it is today. And attrition is a question that we're often asked as we think about pharmacy channel at all, where people don't necessarily have what you would call lock-in periods like they have in DME. And what we've seen in our experience in the DME channel is that even though people stay with us for 4 years because of that warranty period, we see people staying well beyond the 4 years, whether it's through another pump purchase or just staying on the pump outside of warranty because high quality of the pump, it just keeps working, so there's no need to transition. And so we feel comfortable that when people try out our technology, they stick with it. And even in this model where maybe they won't have the same sort of dynamics in terms of restrictions from switching from one to another, we think they'll stick with us.

Our next question comes from the line of Chris Pasquale from Nephron Research.

I appreciate all the additional info and the different metrics this quarter is going to be helpful to track these initiatives as they go forward. John, I wanted to ask about the international transition. When you first sort of talked about this, it seemed like it was largely going to be a 2025 headwind. But now it sounds like it's going to have a significant impact on 2026 and possibly even beyond depending on sort of what other countries you're getting into late this year. Can you talk about why it's such a protracted process? And how do we think about the point at which you completed this transition to direct?

Well, I think that, first of all, I think our team did an amazing job this year. When you think about it, we made the transition from the distributors. We actually began to hire sales force in the new markets that we're going into. And then we built and installed the infrastructure that will enable us to actually ship a product and bill for it. All of those are major tasks. And I think that it's -- we're biting off a significant amount of operations when we go into these new countries this year. Of course, we're going to 3 this year. And I think that trying to do it all at once would be just too risky. And so I think that putting it into a 2-year period is the right way to do it. As we did progress this year, we essentially got all of that done. We are now live in those 3 countries and we installed all of the infrastructure to do that. We're basically using that as a playbook now, and we're going to do the exact same thing this year for the next countries that come in 2027. So I think that we feel good about it. I think it's staged properly. And I think that when we get to 2027, I think that that's the majority of the transition that we plan to make. I think sort of in the long term, we intend to have a hybrid model where we do have direct business, and we intend to continue to work with many of the fantastic distributors that we have in the international markets. But it's gone very well, and I think it's going to go just as smoothly in '26 and '27.

Our next question comes from the line of Danielle Antalffy from UBS.

Really congrats on a good quarter and for making this move here. I guess, Leigh, just on the leverage, that was really nice to see in the quarter. Good to see in the guidance and the commitment to that. I'm just curious what the different levers are here. Obviously, ultimately, pricing in the pharmacy and the significantly higher ASP there is helping. But maybe talk a little bit about the levers going forward in '26 but also as you think over the next few years.

Sure. Thanks for the question, Danielle. You named probably one of the biggest levers we have right now, which is pricing. As we look at the value that can come from this transition that we're making in the pay-as-you-go model, that will continue to bear great fruit for us in the next couple of years in terms of a growth perspective on revenue and profitability. But also so important to remind that we do have a number of product cost reduction initiatives in place. One of them really comes from Mobi as we continue to build and scale that part of the business. In the long term, Mobi, and we're getting very close with the pumps to being at scale. The manufacturing cost of a Mobi versus the t:slim is 10% to 15% lower. So that's one piece of it. And then as we continue to build up the cartridges and think about that contribution, that will be 20% or lower or higher, I should say, reduction in cost versus the t:slim. So as Mobi continues to grow in scale, that will continue to drive gross margin benefit, too. And then you can just take that forward and think about any new product that we launch. Part of our design principles in the R&D process are to consider that new products need to have a better margin profile than the products that we have in the market today and continue to improve upon the products that we have in the market today. And so I would say between pricing and our initiatives within the manufacturing and R&D areas, that's really what's going to drive that leverage in gross margin. And then they get a little further down the P&L to the operating margin. Similarly, we continue to look at our infrastructure and think about what's the best way, how to be most efficient. And we're constantly looking for opportunities and ways to reduce the need to hire more people in the future and just better serve our customers with a lower headcount base going forward.

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

I'd love to talk about the acceleration that you're expecting on the new pump shipment side here in '26. It's one of the better numbers we've seen over the last several years. And I know you have Mobi coming out with Libre 3 Plus and then the 15-day, but you're not assuming any benefit from Tubeless here in '26. So why the confidence in the ability to do that without especially that patch kind of product here in '26 and maybe deconstruct how you get there to see that kind of acceleration?

I would say that while we don't have Mobi in the revenue plan, that's typically the way we've done it in the past, a little bit more conservative when it comes to uncertainty. I would say that we have high confidence we're going to get this thing approved this year. And when you consider Mobi, we'll now have -- it will have multiple sensors integration. It will have Android and it will have iOS and then it will also have a Tubeless implementation. There's nothing else like that on the market. I think as you look at the buildup, just to get to the Tubeless product, we are adding a great deal of functionality to these products. We're also expanding Mobi into the OUS markets, and we're expanding FreeStyle Libre 3 into the OUS markets as well, which has been a point of competition. I think when both those products are there, it's going to be a completely different picture. And so I think the pipeline is certainly a big piece of it. I would say that a lot of the work that we've done with the sales force in terms of improving their productivity, as we mentioned, we have a brand-new system coming online here next month, basically. That's going to substantially improve their efficiency and productivity. So we expect to see that contribute to the new starts. And then finally, I think that pharmacy, pharmacy is something that we think is going to have an impact on our business this year. So I think when you look at that, really, it's the new technology, it's the sales organization, the improvements that happened there last year. And then it's also pharmacy. I think the combination of those will drive the growth that we're going to see in 2026.

Our next question comes from the line of Mike Kratky from Leerink Partners.

Congrats on the great quarter. Maybe to start, just wanted to circle back on some of the Tubeless Mobi commentary. Did I have that right, you said planning on submitting the 510(k) submission in the second quarter of this year is the first part?

That's correct. Yes, we plan on submitting in the second quarter. We have had a great deal of very responsive support from the FDA. And so we do feel highly confident that we'll get it approved in the second half of the year.

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

I get your comments on pharmacy shift and going to flip in a few years. Can you talk about at a high level, how that's going to impact the P&L and sales growth in '27 and '28 in more detail. It's a little bit confusing as you're going to continue to have that shift through the next few years.

Sure. Happy to. So when you think about -- we're talking about the headwinds this year. This year is where we expect that to be more pronounced as we're just launching into it. And we don't yet have what I would call the cover for it coming from the supply sales or the reimbursement on supplies. So you can see, first of all, for every PayGo customer we get into the model, we're going to be getting reimbursement on supplies more than 4x what we get in DME today. So as you build up that base of customers who benefit from getting a pump with no cost upfront, that's going to be a tailwind on revenue in the coming -- in the next couple of years. And then add to it that we do have over 300,000 t:slim Mobi customers today in our existing installed base and the opportunity to shift those people from the DME to the pharmacy channel will also create a tailwind, and that's immediate benefit from one day when they're ordering in DME to the next day when they're ordering in pharmacy, you would immediately see that appreciation. And so I think what's really important this year is even though this is a near-term headwind and it does have a moderation effect on revenue growth, we're still demonstrating margin expansion at the same time. So it's showing the power of what this shift can look like in this first year and just you can imagine how much better it gets in the coming years.

Our next question comes from the line of Shagun Singh from RBC Capital Markets.

I was wondering if you can shed some light on cadence through the year. So the $70 million to $80 million revenue headwind, how do we see it through the year? I think you indicated that this will be effective, I believe you said in late Q1 '26. So anything you can share on cadence on sales and margins, that would be helpful.

Sure. So I think the way to think about it is, obviously, in this first quarter, it's going to be a very low percent of our shipment volumes that will have this effect from the PayGo reimbursement. So the bulk of those headwinds are probably going to be hitting more in the last couple of quarters of the year. And so think about it as low single-digit percentage scaling up to a number that averages to 20% for the year. And margins also, so as we have the same opportunity to transition our supply customers, similar to what we've seen in years past, margins will start lowest in the first quarter. So call it, nearly 54%, getting up to about 60% in the fourth quarter of the year. So you can think about that scaling pretty linearly across the quarters this year. I should add that in the first quarter, in particular, we factored in about $10 million of headwinds worldwide. And you can think about that as roughly split between our international operations and the transition to going direct and between the headwinds that we could see in the first quarter for the PayGo transition.

Our next question comes from the line of John Block from Stifel.

I'll pivot to international. And maybe, Leigh, you can talk to some of those moving parts. It seems like you've got, call it 3% revenue growth from the extra 30% price on an incremental 10% of volumes. I'm guessing your FX tailwind, I don't know, is 4%, 5%. Then you got this headwind from the move to direct. So maybe you can just flesh it out what's the underlying growth. It seems like it might be 7%, 8%, high single digits and compare that to how you exited the year, which seems on a really, really good trajectory of mid- to high teens.

Thanks for the question, John. You're right. There are a lot of moving parts. I think at the highest level, I'll just start with the fact that we are actually very strong in the international markets and continuing to expand the market. Majority of our shipments today still come from new customers, and we're just beginning to see a more meaningful contribution from the renewal opportunities there. And then you take some of these structural pieces and you think about it. So as you come into 2026, we have the benefit from those markets that are going direct already that are going to provide that price appreciation. And so this year, you're not going to see the full effect of that 30% that you mentioned. That's the way to think about long term. Any market that goes direct, we should see a premium of approximately 30% in any given year. The pricing, when you blend it this year, direct to distribution, it's probably mid-single to high single-digit price increase building up across the year as we transition into those markets. That is, if you will, it's funding the headwinds that we're going to see in the additional markets that are going to go direct this year. So as we think about that headwind, we've sized that at about $15 million and thinking about, as I just mentioned, roughly $5 million-ish in the first quarter. And the rest of it, majority will be hitting in the back part of the year, probably the fourth quarter. But underlying all of this, we're very confident and excited about the opportunity we have in the market. Part of the reason for going direct in these markets is this puts us closer to the customer, better able to sell and the benefits of our technology and bring more people over to Tandem.

Our next question comes from the line of Travis Steed from Bank of America Securities.

I wanted to ask about the quote in the press release you're talking about accelerating sales growth in 2027 and beyond. It's been a while since I've seen you guys talk about a year ahead. I just want to see what kind of is driving that visibility and confidence, how much of that is pay-as-you-go versus Mobi and as you kind of look forward and plan ahead?

I think the most impactful element is going to be the ongoing implementation of pay-as-you-go. We do have the headwinds this year, but we are going to be making substantial progress. And as we move and get more and more of our installed base, more and more of our new customers into the pay-as-you-go model, the revenue impact of that is substantial. And so that's going to grow in time. And so I think most impactful is certainly going to be the transition to pay-as-you-go -- and as Leigh mentioned, in addition to the pumps and the supplies that come along with the new pumps, there's also the opportunity to convert the 325,000 people who are existing customers to pharmacy as well. Both of those are meaningful. We also have a very exciting pipeline. We have a lot of technology coming to the market this year. We will have the first extended wear patch in the market, and that's going to be meaningful. I think that right now, there's nobody competing with our patch competitor. And so we will have a device that has the same form factor. It will be in the pharmacy channel and has a better algorithm. So we expect that to do quite well. So -- and then beyond that, we've got a very exciting pipeline that's going to continue to come, including our move to a fully closed loop system with -- hopefully, we see that in the market in 2027 or 2028. So I think all of these things add up to our confidence as a management team that we will see growth going forward in '27 and beyond.

Our next question comes from the line of Jeff Johnson from Baird.

I am on a train. So if I break up here, I'll just jump back in queue. But Leigh, you mentioned that the pharmacy pricing is going to be consistent with what others are out there on a tubed pump side in the pharmacy channel. Just to put a number on that for modeling purposes, $450 a month, is that a reasonable price to dump into our model as we try to build this out? And you talked about some of your installed base maybe starting to get their supplies in the pharmacy channel. I think from your comments, it sounded like they get that same price for their supplies, but ostensibly that higher supply price is also supposed to include some amortization of the pump. So if I'm a current user that jumps into the pharmacy channel, am I also going to get that $450 a month or whatever the right number is there? Just help out.

Yes. A lot of good commentary and questions there, Jeff. So the way I'm asking people to think about it this year is we're just getting going with this, right? So we're launching into the market with these new contracts effective here late in the first quarter. And there's a mix of contract terms, I would say, within the contracts that we have. And so think about the dynamics could be whether we have preferred or nonpreferred access, which influences what the rebate looks like, how much co-pay assistance we use. So long story short, what I'm suggesting to start with this year, at least from a modeling perspective is to think about it as about $350 per month per customer. And that's going to give us the starting point as we take the time to monitor the trends to see what is the real utilization and mix across the contracts that we have and further inform you in the future for how to think about where that average state could be. But I would say that's a really good starting point. And that alone is a really great benefit versus the DME pricing that we see today. And so -- and when you think about this, asking about what does this mean for people who already bought a pump versus people who are getting a pump for the first time, it's almost like a reset, if you will. And so basically, going forward, the whole business will be structured, I would say, agnostic to whether they're getting a pump today or not, and it will be consistent pricing across the customers, if that makes sense. And so again, I would start with about $350 per month as a modeling point, and we'll continue to inform you along the way as we get more information.

Our next question comes from the line of Jayson Bedford from Raymond James & Associates.

This is Elaine on for Jason. I wanted to ask a question on type 2. So could you please give us some color on the progress there? There was also an update to the ADA guidelines recently on C-peptide testing. How does this new guideline help with your discussions with CMS? And can this lead to an inflection in type 2 new starts?

Right. So I mean, we're excited about the type 2 market. It doubles the size of our addressable market in both the U.S. and OUS. In 2025, we obviously got the indication. We ran the pilot, and we went to full commercial availability in the fourth quarter. We learned a great deal in the pilot, and we actually saw a pretty significant bump in starts between the third and fourth quarter, the quarter that we actually had the full organization working on this. As we look at 2026, it's basically a core that we intend to focus on type 2 and invest in marketing and also some research relative to PCP and OUS markets. I think we've got tailwinds as we enter the market with FreeStyle Libre 3 and Mobi implementation. Obviously, Mobi Tubeless and pharmacy channel is also going to drive uptick. And relative to the C-peptide decision, it's also a potential positive for us as the Senate has asked CMS to review the NCD and make a decision in August of '26, which is not that far away. And certainly, having that go away will substantially improve Medicare's access. So we have 1 quarter with the data, and it's very positive. And I think that we're looking forward to seeing good growth in 2026 based on everything that we've got going on.

Our next question comes from the line of Richard Newitter from Truist.

This is Felipe on for Rich. Just in the context of renewal pump shipments, we get a lot of questions about a potential drop-off in 2027, considering the prior 4-year drop-off in new patient starts. I'm just wondering if you could help give us some context on how you're thinking about, I guess, out-year pump shipments and how that fits into your strategy with pharmacy and maybe any potential offset you can get in pharmacy if there is a potential drop-off in pump shipments in 2027?

Sure. It's a great thing that I'd like to highlight. So as you do think about it, I think people have looked at our model and see that when you look back 4 years ago, the number of opportunities will decline here in the coming years a little bit from what we've seen before where we were on an uptick. And so this year, in particular, we still expect renewal shipments based on the normal model and the normal -- the waterfall that comes with it, that renewal shipments will still grow double digits year-over-year. So we have that tail of opportunities even though new opportunities in 2026 are flat versus what came to market in 2025. But I think it's a great tie-in to pharmacy. As we look ahead and think about this model, it greatly reduces the reliance on renewals as a driver for the business. It's important that we retain our customers, and we have really great retention rates, but we don't have to worry about going out every 4 years. And if a patient is comfortable with the pump they're on and it's working just fine, trying to convince them that they should buy their next pump or worrying about insurance cycles that come with it. And so I think for us, it's really important to transition these folks into the pharmacy channel where for them, it's a lower out-of-pocket. It's easier for physicians to prescribe and there's none of this worry about when I get my next pump. And so as we look ahead, where the opportunities in the U.S. at least will start to decline, that won't be a concern about our ability to grow the business. You didn't ask about international. It has nothing to do with pharmacy, but I just want to underscore our renewal opportunity outside the U.S. is growing and becoming a more meaningful contributor there, and there's a lot of room to benefit from that in the coming years.

Our next question comes from the line of David Roman from Goldman Sachs.

This is -- it's Phil on for David. Probably directed at Leigh, I wanted to double-click on the gross margin trajectory, a lot of emphasis and fairly so on sales and sales cadence moving forward. But logically, there's a headwind to gross margin this year with the sales transition. Can you talk about sort of the trajectory or the exit rate from maybe this year or when things normalize in '27 for underlying gross margins and help quantify what the headwind is maybe this year that's going to lift next year or beyond?

Sure. So maybe I'll just start with the fact that in 2025, before we even had a meaningful pharmacy opportunity, we already stepped up gross margins substantially year-over-year by 3 points on an annual basis. And in 2026, I think important to understand that even with this moderated sales growth rate, we can still expand margins another 2 to 3 points. And so we expect to exit this year at about a 60% rate. And you make a good point about the headwinds, putting a little bit of pressure on margins. So that just means that it gives us more opportunity to expand those faster in the future. And so we're very focused on driving that. I mean it's a very important part of our business with everyone. We've always been focused on sales growth, but what we want to show is that we have the ability to drive margins like you see at competitive levels across the market.

Our next question comes from the line of Joanne Wuensch from Citi.

There's a lot going on in 2026, both in the U.S. and outside the United States. You've sort of addressed sort of how to think about the first quarter, but can you help me understand revenue and, I guess, gross margins, the progression throughout the year? I mean, not to give specific second, third or fourth quarter guidance, but maybe ratios or something just to sort of lay the groundwork so we set the models up correctly.

Sure. I'm happy to help with that. So I'll start with the U.S. I think that's where you see probably where you're trying to untangle all the parts and pieces and how they might influence the year. From the perspective of U.S. shipments, let's start with that. And remembering that still 80% of our shipments will be through DME this year. I would expect the same seasonal curve on pump shipments. So you think about the lowest point in Q1, the highest point in Q4. And that has a heavy influence on gross margins. And I would say the way our margins have been structured historically. And so where we've always seen that pumps have the highest gross margin and supplies are or meaningfully lower than that. And so that's why you can expect a similar trajectory of gross margin across the year, starting at about 54%, scaling up to 60%. And when I say scaling up, I mean measurably stepping up across each quarter of the year because even though we have these headwinds, if you will, on the pump price with the pump going out the door at $0, we have that opportunity to continue to fuel margin expansion with the pricing benefit that will come from the supplies and the supplies we shift into the pharmacy channel. We also have the OUS business to help there. So we're going to be scaling up our direct business across the year, and that is also positive and beneficial to gross margins despite those headwinds that we expect to see there. And so I would say when you think about the revenue models and the margin models, this year, not yet too dissimilar from what you've seen from years past. But we do expect, as we look ahead, as pharmacy becomes a bigger piece of our business, it will start to level out those seasonal curves to some extent. But for now, I think I would start with similar assumptions to what you've seen before.

Our next question comes from the line of William Plovanic from Canaccord Genuity.

So I was just -- if you can help us out with this transition on the PayGo model, how many months to breakeven on that in your models? And then I don't think you talked about free cash flow in 2026. Do you expect free cash flow positive in '26? How should we think of the quarter cadence of the cash burn? Typically, Q1 is a heavy cash burn quarter. So just so there's no surprises. Can you help us with that?

Absolutely. I'll start with the breakeven question. There actually a number of ways to answer that question, but maybe one way that I can help you think about the impact on the business is when you think about a PayGo customer, there's a breakeven point for an individual customer as we offer the $0 pump, and it takes a number of months in order to cover that with the supply sales for that customer. But because we have this opportunity to shift our existing customer base, you can think about it as one PayGo customer plus 2 existing customers, you break even within -- pays back within a handful of months. And so it doesn't take too long in order to pay back or to cover this headwind that we would see. And that also dovetails a little bit into the cash question. We did exit 2025 free cash flow positive. And to your point, we usually see a dip in the first quarter of the year as we pay out annual incentives, compensation and that sort of thing. This year, on an annual basis, taking all this into consideration as we make the transition, we expect to be free cash flow neutral this year. And by the end of the year, starting to ramp up back to a positive position as we move forward into 2027. We're, obviously, as we make this transition going to be very mindful of our cash balance, but I think that's a good way to think about it across the year.

Leigh, I wanted to make another point about the move to PayGo that it may not be as clear as I've spoken about it a moment ago. But as we move to PayGo, we eliminate a significant number of the barriers that we have with DME. And I think if you think about DME today, it's a problem for the physician to prescribe it. This [indiscernible] has to go and jump through hoops to provide information to justify the purchase. It's troublesome for the patient because they've got to go back and forth, provide information. It takes time. The other thing, too, is one of the most significant challenges, I think, for people these days in the DME channel is it's a large out-of-pocket. And so starting now, I mean, some people might have to pay their full deductible. And that can be $1,000 or more. And so the benefit of the pharmacy channel is that it eliminates the friction. It's easy. It's easy for the patient, and it's also very easy for the physician and their staff. And it eliminates that large upfront payment. And so the monthly payments are also -- they can be lower. And so it's a -- again, it really does address the problems that we have in DME. And I think that it does explain, I think, why we expect to see the pharmacy drive uptick in new patients, and that's going to benefit the business.

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

This is Shaymus on for Suraj. Can you just talk about what you need to do to move patients from the DME to the pharmacy? Anything that you can do to, I guess, make that faster -- move that faster through that channel to that channel? And then with pay-as-you-go, as you move towards pharma, do you have to account for anything as a percent of bad debt or uncollectible as you switch to those contracts?

Thanks for the question. So I'll answer the last one. Nothing particular to think about in terms of unusual accounting treatment, I would say, in that regard. Think about it as a normal revenue stream as supplies are purchased over time. And the question about how to move patients. So the first thing we do is we share with them how much better the benefit can be for them from an out-of-pocket perspective. And so when you compare to DME supplies, they often have to be deductibles at the beginning of the year. So it can be a heavier out-of-pocket then. Maybe it's best at the beginning of the year. But on pharmacy, it can be more consistent and we actually have the ability ourselves to help buy down or subsidize, if you will, that co-pay. And so the main thing is helping them to understand the benefit and how much better it can be for them financially. We also -- people tell us about how much they love our customer service and they fear this change might take away that relationship they have with us, and we're reassuring them that this is good, good for you financially, and we will still maintain the same level of customer service that we have today. The only other, I would call, a small friction piece, if you will, is it does take another prescription from the physician. So we do need to get the physicians involved to write a new prescription for that patient within the pharmacy channel. None of these are insurmountable in terms of moving people over. They're just work and so that's why it's not an overnight change. It's something we have to work on over time. But we feel very confident in our ability to be able to ship those customers. And especially as we build more and more access, it can be a broader offering across the whole market.

Our next question comes from the line of Mike Kratky from Leerink Partners.

Mike sorry, you got cut off the last time.

No, no worries. I should have asked both upfront. So that's on me. But thank you for circling back. So I wanted to ask about the U.S. renewal opportunities. I think in 2025, it was up around 18% just for the opportunities, if I have my numbers right, and renewal shipments was up closer to around 10%. So if renewal opportunities is effectively flat for 2026, what's giving you confidence that you can really grow that double digits this year? And is there any kind of risk around that?

Great question. So first, I'll just maybe give a little more direction on the shipments in 2025. They were up well above 10%. So we did see a higher growth rate on renewal shipments. And when you think about 2026, the number of opportunities are flat compared to 2025. So that's one calculation. The growth comes from the fact that we have a tail of customers from years past. And so remembering how our renewal model works, when warranties expire over the course of about 18 months, we get to a 70% or better capture rate of people buying that next pump outside of warranty. And so what we have are still a fair amount of people from 2025, especially if you think about the people in the fourth quarter whose warranties expire that we've hardly even talked to yet. So there's still a fair number of -- a nice sizable opportunity base coming from '25 and some even left over from '24. So that's going to fuel the growth so we can still grow renewal shipments double digits in 2026. And then just wrapping it up with that concept again about pharmacy and the ability to shift people or transition them to pharmacy supplies, it will take away that reliance on driving those renewal purchases of a pump, and we can just keep them on their supplies as long as they would like without having to worry about that timing of when renewals come to market. So we're very excited, if you haven't taken that away from today about this pharmacy opportunity for us as a business. This year is going to be a great year of transition for it, and I think you're going to really see some really exciting outcomes in the coming years. And so we look forward to demonstrating those in the coming quarters.

Thank you. At this time, I am showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.