Welcome ladies and gentlemen to the fourth quarter and fiscal year 2023 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. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties which could cause the 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 filings 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 the new information, future events or otherwise. This call will 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 our earnings press release on the Investor Relations portion of our website. Today’s call will be hosted by Dan Reuvers, Tactile Medical’s President and Chief Executive Officer, along with Elaine Birkemeyer, Tactile’s Chief Financial Officer. I would now like to turn the call over to Mr. Reuvers. Please go ahead, sir.

Thanks Operator, and welcome everyone to our fourth quarter and fiscal year earnings call. Let me provide a quick agenda for today’s call. I’ll start with an overview of our fourth quarter financial results and the primary factors that contributed to our performance, followed by a review of some of our recent operational highlights. Elaine will then cover our quarterly financial results in further detail and review our 2024 financial guidance, which we introduced in our earnings press release this morning. I’ll conclude by discussing our outlook and strategic priorities for 2024 before we open the call for questions. With that as a backdrop, let’s begin with an overview of our financial performance. We were pleased to demonstrate revenue growth in both lymphedema and airway clearance products, post record quarterly profit, and further strengthen our balance sheet by continuing to generate solid cash flow from operations and retiring our line of credit entirely. In the fourth quarter, we generated revenue of $77.7 million, representing 5% growth on a year-over-year basis. Our fourth quarter performance enabled us to achieve our guidance for the fiscal year. Our year-over-year revenue growth was largely driven by performance of our lymphedema product line, which grew 6% year-over-year to $69.5 million. We were also pleased to see better than expected sales of our airway clearance products, which totaled $8.2 million in the fourth quarter, representing 16% on a quarter-over-quarter basis and 1% growth compared to prior year period, despite transient headwinds. We complemented our revenue performance with notable improvements in profitability, which exceeded our expectations for the fourth quarter. GAAP net income increased 77% year-over-year and adjusted EBITDA grew 27% year-over-year. Our performance in the fourth quarter reflects our enduring commitment to enhancing our profitability profile. We also generated $18.4 million of cash flow from operations…

Thanks Dan. 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 $3.8 million or 5.1% to $77.7 million. By product line, sales and rentals of lymphedema products, which include our Flexitouch and Entre systems, increased $3.7 million or 5.6% to $69.5 million, and sales of our airway clearance products, which include our AffloVest system, increased $52,000 or 0.6% to $8.2 million. Continuing down the P&L, gross margin was 72.1% of revenue compared to 70.5% in the fourth quarter of 2022. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 72.5% compared to 71.2% in the prior year. The increase in non-GAAP gross margin was attributable to lower freight and manufacturing costs as well as improved product pricing. Fourth quarter operating expenses decreased $40,000 or 0.1% to $44.2 million. The change in GAAP operating expenses reflected a $1 million decrease in non-cash intangible asset amortization and earn-out expense, a $0.5 million decrease in sales and marketing expenses, and a $0.3 million decrease in research and development expenses. These items were largely offset by reimbursement general and administrative expenses, which increased $1.8 million. Operating income increased $4 million or 50.3% to $11.8 million. The improvement in operating income was driven by a $3.9 million or 7.5% increase in our gross profit, as well as the aforementioned $40,000 decrease in our operating expenses. Non-GAAP operating income increased $3.2 million or 34% to $12.7 million. As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and earn-out expense, as well as certain non-recurring operating expenses in the prior year period. We’ve provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other expense net decreased $0.9 million or 96.2% to $36,000. The decrease…

Thanks Elaine. As Elaine mentioned, our guidance reflects growth in both our lymphedema and airway clearance product lines for the full year. It also assumes that more of our full year growth will be driven by our performance in the second half of the year as prior year comparisons ease and we realize the benefits of our 2024 strategic initiatives, which I’ll walk through now. As we look to 2024, we’re focused on delivering another balanced year of double-digit revenue growth coupled with continued improvements in operating profitability by executing the following three strategic priorities. First, we remain focused on driving growth in both our therapy segments. This will include adding sales reps to both our lymphedema and respiratory teams in the first half of 2024. We also plan to contribute to ongoing gains in sales rep productivity by expanding in-home demo support among our patient trainers. As I mentioned earlier, with roughly 30% of in-home patient demos conducted by our patient trainers at the end of 2023, we see more opportunity to build on the success of this initiative in 2024, freeing up even more time for our lymphedema sales reps to engage with prescribing clinicians. We expect to continue our increased level of focus on entry-level pump placements with our improved Entre Plus system. Knowing that so many patients enter the therapeutic funnel with an entry-level pump, either due to initial symptoms or payor requirements, we plan to compete vigorously to provide whatever therapy the patient qualifies for. For the AffloVest front, we intend to not only expand our sales specialist headcount but to work on on-boarding additional DMEs, showing them that AffloVest is becoming a valuable part of the respiratory DME arsenal and a new offering for them to compete with. Second, 2024 will be a year…

Thank you. [Operator instructions] Our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Hi, good morning Dan and Elaine. Thank you for taking the questions. Congrats on a solid Q4 and great to see the leverage in the quarter. I wanted to ask about the guidance construction on the top line for 2024, the $300 million to $305 million - I think that’s 9% to 11% growth. Can you just help us understand how you framed the expectations for growth for both lymphedema and AffloVest? I think I heard they’re expected to both kind of grow around that range, but wanted to confirm that and then also just, I guess, understand what’s contemplated for those segments and how you arrived at those figures, and then I have a follow-up. Thanks.

Sure Adam, thanks for the questions. Let me start with a little bit of color on the growth drivers for 2024, and then maybe I’ll ask Elaine to weigh in on some of the additional assumptions. I think if we look back, certainly at 2023 just for context, I think we recognized and were able to demonstrate where growth can come from. Really, three key areas in our recent past in our performance was attributed in the past to adding heads, and we know that the heads we added in ’22 became productive in ’23 and contributed pretty meaningfully. Tech support that we’ve continued to expand to liberate the sales force has led to more productivity - we saw about 14% improvement last year with a relatively flat headcount, almost $100,000 of additional productivity per head, and then a simpler Rx process. Remember at the beginning of last year, we introduced the elimination of the CMN courtesy of Medicare and an easier form, and all of those things we talked about were nice contributors, so as we look into 2024, increasing headcount in the first half is part of the playbook again. We added just a few in December, but we expect to add some additional heads in the first half of this year, and that should be a growth driver as we get into the back half. This whole productivity piece, we think that probably half of the growth that we’ll be able to deliver this year can come from some continued expansion in productivity. The fact that we have about 30% of the in-home demos done now by someone other than the sales force certainly proved productive last year, and we think that there’s more runway to expand as we enter into the second half. Then the whole HCP experience is a really important one that we’ve recognized can influence prescriber behavior. The easier we can make it for them, the more we’ll be their therapy of choice, and I think that patients that need therapy don’t get overlooked when it’s an easier, less obtrusive process, so we’re going to continue to invest in some electronic tools that will make it a much more easy process for HCPs to submit those orders. I think on the AffloVest side, we’ve talked a little bit about the fact that we have to lap that May event with the one DME, but we’re going to invest in more sales people there as well. We added a few in the fourth quarter and we’ll add some additional heads in the first half of the year, and then continuing to focus on expanding branch participation not only among the DMEs we already work with but piloting some new DMEs, and I think all of those things should certainly be contributors as we look into the balance of 2024 as well. I don’t know if, Elaine, you’ve got a couple of comments on some of the other assumptions?

Yes, I think maybe the only thing I would add is the adjusted EBITDA guidance we’ve provided does suggest a small improvement in EBITDA margin. We will continue looking at driving productivity, getting operating expense leverage; but as Dan mentioned, we are making investments this year in headcount growth as well as technology, so we don’t expect large improvements but we do expect a modest one. Then secondly, we are going to continue to focus on increasing our free cash flow. We made great strides last year - you know, close to $33 million of free cash flow improvement. We will continue to look at driving free cash flow both from our profitability as well as continued improvements in working capital. I will say the working capital improvements won’t be to the same extent as last year, but we do still think there’s runway to continue to work on improving our collections, which fueled a lot of the growth last year.

That’s great color, appreciate the fulsome response there. Elaine, I think you just ticked the box on my second question on the leverage piece, but maybe I’ll stick with the financials. I guess I wanted to ask about the LRP that you’d previously outlined - I think on the top line, it’s $350 million-plus in 2025 of revenue. Just wondering if--and I think that would imply kind of an acceleration to growth in ’25 over ’24, so what can you tell us about how we should think about the LRP? Does that still stand firm, and are you comfortable with the acceleration in growth that’s kind of implied for ’25? Thanks for taking the questions.

Yes, let me take a shot at that one, Adam. First of all, our ’25 targets are still good targets, we believe. I think that staying focused on revenue, profitability expansion, free cash flow, those are still very much in sight. I think we’ve certainly made good progress in 2023 against those - I mean, if you reflect on the first of this three-year window that we laid out, our lymphedema growth of 14% in 2023 was actually a little ahead of our expectations. The $33 million of cash flow as ahead of our expectations, and then as we know, we kind of lost a year on AffloVest, so some puts and takes happened in 2023. Plenty of work left to do, but I think we still expect that when we exit 2024, one of the reasons growth isn’t always perfectly linear, we think that we’re really going to be nicely positioned for some addition inflection points. If we think about from a growth standpoint, we’re going to have more reps at the end of the year presumably hitting their stride on productivity, both in lymphedema and the airway clearance side. We should have an optimized home demo assignment, so continuing to expand the productivity of applying those to the right people on the team. Some of the tech deployed EMR medical record exchanges that we’re investing in this year should be more operational at the beginning of 2025, some of the new products that I alluded to, I think the head and neck results that we’ll be able to socialize through 2025, and then just some of the normalized Afflo growth that we’re not going to have to confront in the first half of this year, next year. I think we’ll be certainly entering the on-ramp of 2025 with some good momentum at our backs, and those are the targets that we’re still pursuing for sure.

Thanks for the color, Dan.

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

Hey, good morning Dan and Elaine, this is Izzy on for Ryan. Thanks for taking the questions. Just first, to start off on guidance, I heard your comments on expecting the first quarter to be flat to up low single digits, but I was wondering if you could provide a little bit of color on what’s driving that expectation and how you’re thinking about the cadence or pacing for both revenue and margins for the balance of the year.

Yes, I’ll start and then if Elaine has anything she wants to add. I think as we thought about, Izzy, in the first quarter, we know Afflo is going to be a bit of a headwind, as we’d called out earlier, so that’s one we have to offset for. We had somewhat modest lymphedema guidance in the first quarter, in part because we probably don’t benefit quite as much from the demo assignments in the first quarter. That’s a quarter we have the highest copays, since patient copays reset, so our sales force, I would say is a bit more protective of allocating some of those in the first quarter. We added headcount, started in December and will continue to add some more heads in the first half of this year, but as we know, those heads historically won’t be really productive until the second half. Then I think if you look at it from a historical standpoint, it’s a step down sequentially of somewhere in the mid-20% from Q4, which is pretty typical if you looked over the last three or four years. I think history would show that that’s pretty much in the normal range. I think the last one is it is the quarter where we’re going to have the toughest comp. It’s a little bit of an inverted scenario from last year, where we had the easiest comps at the beginning of the year and they progressively got more difficult. We kind of turned it upside down, so getting past Q1, I think those are some of the assumptions that we had applied in.

Great, that’s really helpful. Thank you. Then just a follow-up for me, what are you guys thinking about, or how are you thinking about the impact from faster Medicare collections in terms of cash flow and your subsequent use of cash?

Yes, so I think as I alluded to a little earlier, we do think there’s still opportunity for us to continue to work on improving our cash collections and improving working capital. That being said, we made a lot of traction last year, and so to expect to repeat that, we don’t think is realistic, but we do think there is still some runway ahead for the year. As far as kind of use of cash, I think one thing we did do at the end of the year was retire our line of credit. We also completed our AffloVest earn-out. As we look forward, we still have more debt that we have to continue to service, and we are making investments in technology and headcount that Dan alluded to, but clearly the stronger balance sheet position that we are proud to now have does offer us some good optionality as we think about continuing to grow the business in the future.

Great, thanks for taking the questions.

Thank you. Our next question comes from the line of Margaret Andrew with William Blair. Please proceed with your question.

Hey, good morning guys. Thanks for taking the questions. There’s a couple things I wanted to follow up on. First, I wanted to talk a little bit about first quarter guidance. Dan, I know you just said that maybe it’s typical historical sequential pattern if I look at, like, ’18 and ’19, it’s typically maybe in the mid-20s, maybe even in the 23%, down 24%. This seems like it’s maybe a little bit worse, and I guess I’m asking because Q4 obviously was also a little bit lighter relative to typical seasonal patterns for Q4. Is there anything else underlying--you know, maybe you didn’t quite have the numbers of sales reps or so on, and so that starts to change trajectory throughout 2024? Just wanted to push on that seasonality pattern, especially if it implies for Q1 and pushes more of that pressures into the second half of the year for growth.

Yes, thanks Margaret. Yes, I think our current guidance suggests a decline in Q1 of about 25% to 27%, so if you take a look back, it’s fairly similar - I went back to 2020 and it’s in line with what we’ve seen over the past several years. I think as we think about Q1 and what Dan mentioned, again it will be our hardest comp. We had 22% growth last quarter and we’re making a lot of investments in the first half of the year, which really will accelerate growth in the back half - you know, the sales rep adds, the technology. I think the other thing just to note that we saw in Q4 and will continue to see in this year as well is that Entre growth continues to outpace Flexitouch. We’re still growing Flexitouch, but the Entre growth, as Dan mentioned, is a bigger segment that we’ve chosen to focus on, and that does mute growth a little bit in the sense that our patient served is actually growing faster than our revenue growth, and so that’s another piece that we saw in Q4 and will continue to see in Q1 as well.

Okay, and then the second thing that I wanted to push on a little bit as well is that 2025 LRP, and so again just to put some finer numbers on it, if I look at what that implies for ’25, you do need a 15% top line growth number in 2025, which is maybe up from 10% this year, so 50% acceleration, I guess, in sales growth and a pretty sizeable margin expansion of 300 basis points plus. As you kind of look at that, are you assuming a meaningful uptick in head and neck, or acceleration relative to that next-generation system to reach those numbers, and then kind of a similar comment on the margin side, what gets you to get that pretty meaningful step-up as you go into 2025? Thank you.

Sure Margaret. As I said, it’s tough to do a three-year plan linearly, but if you looked at 2023, 14% lymphedema growth was ahead of the 13% CAGR we’d kind of put out there for a three-year window. I think that while we expect this might be a little bit less than that in 2024, there are some things that we think are going to be really well positioned as we enter 2025. Remember last year, we added zero heads and we just got productivity out of the ones from the past in expanding demo performance with other allied support folks on the training side. We think that there’s still opportunity to continue to expand that in the second half of this year, and we would enter next year then with a higher productivity profile, presumably, in our entire sales force, along with some folks that we would add in the first half of this year that should be entering 2025 with just a naturally higher trained productivity quotient on top of it. The tech deployed work that we’re working on to try and simplify the process for HCPs to submit their referrals, it’s not an insignificant one. We saw at the beginning of last year that when we can make things a little bit easier, whether through forms or process, it does actually have an impact on prescriber behavior, so the investments that we’re making this year are intended to introduce by the back half of this year an electronic EMR experience that should be easier for the prescriber, and we think that influences their vendor choice and it also influences just the volume of patients they’ll take the time to prescribe for. Head and neck, as you alluded to, that one’s certainly going to be a more contributor once the results are complete this year, into next year; and I think the other one is we’ve clearly stated that AffloVest is going to have a headwind in the first half of this year, and we’ll have a more normalized expectation for next year. I think there’s reason to believe that our top line growth can have some ebbs and flows, but we think that--you know, as I said, we should enter the on-ramp of 2025 with some things nicely set at the table. I think from a profitability standpoint, I’ll just let Elaine add a little bit of color to the other half of the question.

Yes, I think as I mentioned, 2024 we don’t expect large EBITDA margin gains, and really this is--we’ve got sales reps that we will be carrying on our books that are not going to achieve productivity until later in the year. Similarly, we’ll be making investments in technology that we will not have fully ramped and in adoption until later 9in the year, so those things change in 2025, those are now fully productive assets, and then we will continue to have the opportunity to optimize once they’re in place to see further opex improvements. That’s really why that profile for 2025, we think is going to look different from an EBITDA margin expansion compared to 2024.

Thank you, guys.

Thank you. As a reminder, if you’d like to join the question queue, please press star, one on your telephone keypad. Our next question comes from the line of Suraj Kalia with Oppenheimer & Company. Please proceed with your questions.

Good morning Dan, Elaine. Can you hear me all right?

We can, thank you.

Pardon the background noise. Dan, let me stick with some SRP questions, okay, short range. Specifically, you mentioned sales rep productivity is up 14% year-over-year, but the number of in-home trainings is up 30% or exited at 30%, and lymphedema sales are up 6% year-over-year. Maybe Dan, help dissect this - I know it’s not a linear correlation, but how much incremental rep productivity is there in the existing sales force, and how is the decision made to add more heads versus squeeze extra productivity going into ’24, maybe ’25?

Yes, good question. Look, we still believe, as we said, Suraj, that there is additional productivity by expanding the demos being reassigned. I think that said, we still fashion ourselves as a growth company, and we want to make sure that we’re continuing to invest in growth, and I don’t think that it’s binary. It’s not continue to expand productivity and abandon the expansion of the sales force headcount, I think it’s a combination of the two that we intend to continue, and I think trying to find the right balance in those is what we’re certainly striving for. Having been able to deliver double-digit growth on a relatively flat headcount last year, I think demonstrated the productivity gains were real, but knowing that still only roughly a third of those in-home demos have been taken off the plate of the sales force, that means that there’s more opportunity. You know, kind of how we thought about it, Suraj, is for 2024, it’s probably half the growth comes from increased productivity as we continue to make some of the improvements that we’ve talked about, and then the other half ultimately probably comes from adding headcount, but that’s more a second half contribution . We know we don’t hire between December and the first half of this year and just flip a switch and they become productive, so we would expect them to be contributing more in the back half, like our historical lead time has looked like, and that should certainly, as I’ve mentioned in a previous question, put us in a much better position as we enter 2025 as well with another step up in sales force for the most part having all achieved their productivity targets, and an increased number at that.

Got it. Elaine, I’ll send one question your way. Elaine, how should we think about same store, new store growth in the quarter, and also moving forward, should we think about more about opex leverage rather than the typical mantra of top line growth at all costs? Thank you for taking my questions.

Yes, I think Suraj, to your first question there around the new store, same store, there is still good opportunity for us to continue to both acquire and work with new prescribers, as well as to increase volume from existing prescribers. We’re pursuing both angles as we look at both our vascular and oncology and lymphatic therapist spaces. As far as opex, could you repeat that part of the question one more time?

Elaine, what I was just trying to understand is should we expect opex leverage--I mean, you generated pretty good opex leverage in the quarter, is that what we should keep expecting moving forward, and is that coming at a cost of investing for top line growth at any cost? Thank you.

I think for this year, we are still achieving opex leverage, but we’re also making investments, and I think we’re doing both, which is why the opex leverage is not larger. As you look at last year, we drove opex leverage to a great extent. This year, we still have opportunity to do so, but it will be muted by continued investment. As I just mentioned, when you think about 2025, those investments then will be largely done and behind us and now at scale, where we can generate more efficiencies, and so we would expect to see more operating margin expansion in 2025 as well.

Thank you.

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