Good day, ladies and gentlemen. Welcome to the Tandem Diabetes Care Fourth Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we'll be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Susan Morrison. You have the floor.

Thank you. Good afternoon everyone and thanks for joining Tandem's fourth quarter and full year 2016 earnings conference call. Today's discussions may include forward-looking statements. These statements reflect management's expectations about future events, product development timelines, 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. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in the press release announcing our fourth quarter and 2016 earnings, which was issued earlier today, and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K and in our SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or other factors. In addition, today's discussion will include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. For additional information about our use of non-GAAP financial measures, please see the information under the heading use of non-GAAP financial measures in our press release. The company also announced today, in a separate press release, the commencement of an underwritten public offering of its common stock. The focus of this call is to discuss the company's financial results for the year and quarter ended December 31, 2016. In light of that and SEC rules and regulations, the company will not be discussing or answering questions about the proposed financing. Kim Blickenstaff, Tandem's President CEO will be leading today's call. And at this time, I'll turn over to Kim.

Thank you, Susan. Hello everyone and thank you for joining us on today's call. With me is John Cajigas, our Chief Financial Officer. I'd like to take a few moments to talk about 2016 as well as our overall progress since the launch of our first product in late 2012. Then I will be providing some perspective on how we are well-positioned to execute on multiple strategies in 2017 that set our business up for long-term success. First, in looking back at the highlights of 2016, we have continued above-market growth rates in sales, we furthered our product development efforts, and we made significant operational progress. We also saw the launch of our next generation t:slim X2 Pump and received FDA clearance for a Tandem Device Updater, which for the first time allows us to provide customers with software upgrades remotely using their personal computer. These last two achievements are particularly meaningful as they are the cornerstone of our growth strategy. As we discussed on our last call, we also face some challenges that had a significant impact on our performance in the second half of 2016. Most notably were United Healthcare's decision that restricted most of their members from accessing Tandem's pumps as a covered benefit and new pump offerings and aggressive sales tactics that contributed to an increasingly competitive environment. If we take a step back further and look at Tandem's performance from a broader perspective, it highlights how far our company has progressed in only four years of commercialization. For example, I am very proud that more than 50,000 people have chosen a Tandem pump and approximately half of our customers report being new to pump therapy from multiple daily injection. This demonstrates that we are making a meaningful progress in our long-standing goal of bringing the…

Thanks Kim. Good afternoon everyone. Today I'll be reviewing the 2016 and Q4 results on both a GAAP and non-GAAP basis and discussing our 2017 guidance and cash flow expectations. In light of our technology upgrade program impacting our operations and financial results starting in Q3 last year, we believe that looking at our operating results on a non-GAAP basis provides useful information in comparing our financial results to periods prior to Q3 2016. So, today I'll be discussing both GAAP and non-GAAP financial metrics. Our non-GAAP results are adjusted from our GAAP results by excluding the impact of the technology upgrade program. In Q4, these adjustments included a deferral of pump revenues and cost of sales per shipment to customers eligible for an upgrade as well as the recognition of revenues and cost of sales previously deferred while we completed our upgrade obligations during Q4 as well as the incremental upgrade fees earned and the product cost incurred to fulfill the upgrade obligations. Until the technology upgrade program expires in September 2017, we will continue to show adjustments in future quarters. The reconciliation of our GAAP results to our non-GAAP results is included as an exhibit to today's earnings press release. Also as I discussed comparative metrics between Q4 and Q4 2015, I want to remind everyone that we launched the t:slim G4 in 2015 and the t:slim X2 in October 2016. Both of these product launches created changes in the normal sales in gross margin patterns for various reasons such as individual customers pausing and distributors adjusting their orders in anticipation of product launches and the pent-up demand product launches typically create. We believe there is more of a significant pent-up demand and have post-launch interest in the t:slim G4, as it was our first product integration with…

Ladies and gentlemen, the question-and-answer session queue is now open. [Operator Instructions] We'll be taking our first question from the line of Tom Bakas from Piper Jaffray. Your line is open.

Hi guys. Good afternoon. Thanks for taking my questions.

No problem.

Hi Tom.

Maybe if I could start with guidance. Could you just give us a little bit of color on the drivers behind the full year range? Just given all that has been going on in the market and the backdrop with the 670G launch in the next seven months, just -- can you help us understand what's baked into your assumptions?

Sure. As we look at the full year, we think that the first half of the year, primarily the time prior to us launching our G5 integrated product with the t:slim X2 is going to be a continuation of the competitive environment that we've seen so far in Q4 and Q3. So that will be sort of the challenging time of the year. Once we get past that point, we do see the opportunities that I outlined in my comments, in particular pump renewals as well as t:lock Infusion Sets coming into the market and our ability to sort of compete at that point in time and to have the potential -- of our pipeline potentially come into play early 2018.

I'll make another comment. When we just heard this morning that Medtronic is launching the 670G sometime right about now in a limited launch called priority access and we don't know how many people are in that. And then they are going to expand it in the June timeframe. So, they are sort of on the timing that we had in the planning cycle, but we really don't know the numbers and the extent to what this is going to be rolled out in a full-blown way until probably June.

Okay. That's very helpful. Thanks. And then maybe switching over to gross margin. Just -- regarding, John, you're prepared comments on X2 platform, just the 20% reduction in the input cost, if I caught that correctly, as the mix shift to X2 continues, how should we think about gross margin throughout the year, maybe even looking out a bit further? And then along those lines, is there an improvement in the margin contribution from the t:lock?

Sure, so let's take those out one piece at a time. The 20% reduction that you are returning to is in the material cost for the t:slim X2 as compared to our prior pumps and that is an absolute cost reduction it's in play today. It's just harder to see that in the 84% of our volume was t:slim X2 during the fourth quarter and we expect that the high percentage of our sales in 2017 will be driven towards X2s and maybe t:flex. And once we have the G5 integrated I think that will just push that percentage even more towards the X2 product and we'll see the overall benefit of having a material cost reduction compared to our [Technical Difficulty] products. Other things that are going to put into play in 2017, I mentioned that with our warranty cost, there were some warranty issues associated with our newer products, the t:slim G2 and t:flex and as those volumes becomes smaller and smaller percentage of our overall sales that will create a positive impact on our warranty costs as we move forward, that in addition to the actual improvements that we put into place for those products. So, I think that's going to have a positive impact as well. Your question regarding what will the t:lock do from a margin standpoint, I would assume that those continue to be consistent with the margins that we've experienced here with the previous infusion sets.

Thank you very much.

Yes, I just want to add one last thing on that while I did point this out in my prepared comments is while we'll gain greater percentage of our product mix into the infusion sets and pump supply and that may have a suppressing impact on our overall gross margins, I think the gross profit contribution is dramatic and very helpful to our drive to become profitable.

Okay. That makes sense. Thanks. I'll jump in the queue.

Thanks Tom.

Thank you. Our next question comes from the line of Ben Andrew from William Blair. Your line is open.

Well, good afternoon guys. Thanks so much for taking the questions.

Hi Ben.

John thinking about the gross margin targets you gave us of about 55% and 15% market share, how would that break down between pumps and consumables at that point?

Well, I still think that pumps will be a lion share of our product mix as we continue to have organic growth, as we launch the t:slim X2 with the PLGS and TypeZero sort of algorithm with it, I think it will help our mix. We are now just entering the phase where renewals are becoming a significant portion and opportunity for us. I think we have 6,500 pumps this year as an opportunity. Next year, that moves closer to 11,000. So, those are meaningful numbers that continue to drive our sales mix towards the pumps. But I do see a positive gross profit impact of having more and more of the disposable revenue stream coming to Tandem, in particular, the infusion sets.

And to that point, I was curious if you can characterize a bit the conversations with the current distributors about what would cause them to give up that volume in favor of you guys actually distributing the sets to more of the patients that you've been engaged in?

Sure, I think it's really a contractual arrangement that I don't want to get into from a competitive standpoint, but I think they also see the benefits of what we can provide with the infusion set and the custom lower and what the customers are actually looking forward from the benefit standpoint with our new infusion sets.

Okay. That's helpful. And then I don't know if it's you or Kim or who would comment on this, but can you characterize at all a bit more of the impact of the United exclusive Medtronic, because I know you had a pediatric carve-out within that. Did you sell many or any units to that part of the channel in the back half?

Well, there is an exception process and we did work through that, but I don't think we've quantified how extensive that was. Do you have any comments on that, John?

Yes. There is an appeals process that we do pass on behalf of our customers that participate through. So, if they are interested in doing that, we'll help them move through that. Those are very individualized, so they are more one-off situation. Carve-outs are for individuals that are 18 or younger, we continue to sell to that segment of the market as well as those that are part of the Federally funded program, the Medicare Medicaid.

Okay. And then just -- you kind of said right into the next question, so with the G5 getting the Medicare reimbursements now, how does that affect your planning for the launch of the product as you get approval of the PMA supplement later this year?

Well, haven’t we disclosed what percent of our base is, so -- Medicare, Medicaid, John?

It's roughly 15%.

Yes. So, -- that's obviously helpful to those that want to use both CGM and the pump and we think the two together will give better outcomes. But we haven’t brought that -- broken that out as a separate contribution to our growth next year.

Okay.

I think what helps us is Ben, is just to be able to go into the HCP office and be able to address the entire population of demographics versus having to carve out certain either age sort of limitations or payer plan.

Yes. And the same for Dexcom because as they are trying to get into the Type 2 market more heavily as well as the Type 1 and Type 1 users are using pumps. So, that was good news for them and good news for us.

Indeed. Thank you.

Thank you.

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Your line is open.

Hi, this is Samantha in for Kristen. Thanks taking the questions.

Okay.

I realize you won't be talking about the raise that you just announced to us to close today, but how should we be thinking about when that might factor into you reaching a breakeven? In your prepared remarks, you mentioned you might see profitability when you hit 15% of the insulin pump opportunities. So, I guess how should we think about that and when do you expect to get to that point? And what are the drivers there? Thanks.

Sure. I'd like to be careful about what we discuss here in relation to the financing and SEC rules regarding sort of the talking about the financing. I will say that we do believe that at the point that we achieve 15% market share, of which we are probably in the high teens -- I'm sorry the high single-digits today that we will have a 55% gross margin. And that's -- in 2017, we do expect the burn less cash than what we had burned in 2016. In 2016, we burned about $68 million. So, that's probably all I can really say at this point in time.

All right. And then just a quick follow-up in your prepared remarks, you mentioned how clinical data was going to be more of an important part of the strategy. Can you provide just the bit more detail around that? And what kind of data we can expect from you guys this year? Thanks.

We'll have the results from our PLGS trials as well as our TypeZero trials that will be this year and next year. And that will be the -- really the first sort of multi-centered trial data that has control arms that we can point to better outcomes. We haven’t had that in the past because we've the basically on five 10-K tracks and we haven’t had to do clinicals. We also have through t:connect been able to mine patient outcomes for payers and so they find that very helpful in understanding whether we're contributing to better clinical benefits, because we can actually go in without doing a study, not in their center, we can show them what's happening with their patients over time. So, that's the kind of thing that we really are focusing on in conjunction with product features, ease-of-use, use of more advanced features, and that sort of thing. Does that answer your question?

Yes. Thanks so much.

Great. Okay.

Thanks.

[Operator Instructions] Looks like we don't have any other questioners in the queue at this time. So, I'd like to turn the call back over to Kim Blickenstaff for closing remarks.

Thank you everybody for joining us today. We look forward to talking to you next quarter about our progress on all of these initiatives that we've talked about and we'll speak with you then. Thanks.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a great day.