Tactile Systems Technology Inc (TCMD) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the third quarter of 2016 earnings conference call for Tactile Medical.

(Operator Instructions)

Please note that this conference call is being recorded and the recording will be available on the Company's website for replay shortly. Before we begin, I'd like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of Management and involve inherent risks and uncertainties that could cause actual results to differ material from those indicated, including those identified in the Risks Factors section of our final prospectus filed the Securities and Exchange Commission in connection with our initial public offering as well as our recent 10-Q filing.

As 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 include reference 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 those most comparable measures calculated in percentage in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Jerry Mattys, the Company's Chief Executive Officer. Please go ahead, sir.

Thank you, Mike. Good afternoon, everyone, and welcome to our third quarter of 2016 earnings call. I am joined on the call today by our Chief Financial Officer, Lynn Blake. I would like to welcome everyone to our first earnings call with the investment community as a newly public Company.

Let me start the call with a brief agenda of what we will cover during our prepared remarks. As this is our first earnings call, I will begin or our remarks today with a brief introduction to our Company and our business.

I will then turn to a high-level overview of our financial performance during the third quarter followed by a review of some of our recent highlights and milestones from an operational standpoint. After my opening remarks, Lynn will provide you with a more in-depth review of our quarterly financial results as well as an overview of our financial guidance for 2016, which was updated today in our earnings press release.

Following Lynn's discussion of our financial results and outlook, I will return to share some thoughts on our areas of focus for the remainder of the year and discuss our long-term growth strategy. We will then open up the call to your questions. Since this is our first call as a public Company, we thought it would be helpful to spend a few minutes describing the Company.

Tactile Medical is a rapidly growing profitable medical technology Company focused on the treatment of chronic diseases in the home care setting. The Company was founded in 1995 by a lymphedema therapist and operates out of its headquarters in Minneapolis.

We employed approximately 300 people at quarter end. Within the home care setting, we are currently focused on the treatment of two chronic vascular diseases in the United States. Lymphedema and chronic venus insufficiency.

We estimate that these two conditions represent a combined addressable market opportunity for our business of over $4 billion for our existing products in the US market alone. Our current product portfolio consists of three products: Flexitouch and Entre which address the treatment of lymphedema, and ACTitouch, which treats venus leg ulcers caused by chronic venus insufficiency.

All of our products are nomadic compression devices that are FDA 510(k) cleared and received favorable reimbursement coverage from a large and growing base of commercial payers as well as the Veterans Administration, Medicare and Medicaid. We currently have over 260 million covered lives under contract as an in-network provider with payers across the United States.

The Company's flagship product is our advanced at-home Flexitouch system which provides an easy to use one hour daily self-applied treatment for lymphedema. Peer-reviewed published studies have shown that our Flexitouch system provides improved quality of life in clinical outcomes and delivers significant cost savings to payers and patients.

It is the only nomadic compression device that's clinically proven to stimulate the lymphatic system. Over 60,000 patients have now been treated with our Flexitouch system since its launch in 2004 and over 11,000 systems were shipped in 2015.

We employ a direct-to-patient and provider business model, through which we obtain patient referrals from clinicians, manage insurance claims on behalf of our patients and their clinicians, deliver our products to patients and train them on the proper use of our solutions at home. This model allows us to directly approach payers and patients, thereby disintermediating the traditional durable medical equipment channel and capturing both the manufacturer and distributor margins.

We believe that we have a unique scalable platform to deliver at-home healthcare solutions across the US and the strategy is increasingly recognized by policymakers and payers as a key for controlling rising healthcare expenditures. In terms of our financial profile for the year ended December 31, 2015, we generated revenues of $63 million which represented year-over-year growth of approximately 32%.

We also generated GAAP net income of $1.4 million in 2015 and we have been profitable on a GAAP net income basis for every year since 2010. In the third quarter, we completed an initial public offering led by Piper Jaffray, William Blair, and Canaccord Genuity, and managed by BTIG.

As a result of this transaction we began trading on the NASDAQ global market on July 28 and raised net proceeds of $35.4 million to fuel our future long-term strategic growth initiatives. I will discuss our strategic growth initiatives in greater detail later in my remarks but first let's turn to a review of our third-quarter financial performance and operating highlights.

We reported total revenue in the third quarter of $22.6 million which represented a 35% increase over total revenue of $16.8 million in the third quarter of last year. Our revenue performance during the quarter was primarily driven by continued strength in sales of our Flexitouch System.

We reported Flexitouch revenue of $19.4 million, up 33% year-over-year representing 86% of total Company sales in the period. Again, this is the Company's flagship products and contributes accordingly to our financial results. We also saw strong sales of our Entre and ACTitouch devices with combined revenues of $3.2 million representing 47% growth year-over-year.

Overall, we were very pleased to see revenue growth that exceeded our expectations for the third quarter and that this growth represented a continuation of the strong results over the first half of 2016. We are very fortunate to see multiple drivers of growth for the Company. Three primary factors have contributed to our results quite meaningfully throughout 2016, while others have been added to the list in recent months and fortify our ability to drive growth in the future.

Let me share a few thoughts on these drivers now. First, we've made substantial investments in our distribution and reimbursement infrastructure in recent years and, as these valuable additions to the team mature and provide higher levels of productivity, our revenue growth benefits meaningfully.

Second, our Flexitouch sales benefited from the April launch of our latest arm and shoulder garment which was redesigned to provide increased ease-of-use based on feedback received from both customers and clinicians. Third, we increased our contractual coverage as an in-network provider for our products to payers.

These contracts with payers allow their members improved access to Tactile Medical products. Shifting to another long-term driver of growth for the Company, we are extremely focused on increasing the awareness and appreciation for our innovative technologies in the treatment of vascular disease in the home setting. There is arguably no more effective tool to support these efforts than our portfolio of clinical evidence.

And this portfolio was greatly enhanced with the publication of a clinical study on our Flexitouch System in the Journal of the American Medical Association Dermatology in late 2015. The JAMA study was a truly groundbreaking, cost effective study which demonstrated that the use of our Flexitouch System improved patient health and reduced treatment costs.

The evidence of cost savings is compelling and multifaceted. Using our Flexitouch saves the healthcare system money by reducing inpatient, outpatient and physical therapy visits, inpatient length of stay, and by significantly lowering the incidence of skin infections known as cellulitis.

Importantly, we are leveraging this clinical evidence with our larger sales footprint to drive sales productivity by focusing our direct sales organization on the highest diagnosing practitioners across the US and educating them on the therapeutic benefits and clinical efficacy of our products. Regarding other operational highlights, in addition to the progress on securing new reimbursement contracts this year, we were happy to receive an important FDA 510(k) clearance for our Flexitouch System in the third quarter.

This clearance, which we received in late September, expands the use of Flexitouch to include the treatment of lymphedema in the head and neck areas of the body. Obtaining new indications is a great example of one of the many ways in which we are laying the groundwork for the continued success of our Flexitouch System in the marketplace.

Lymphedema commonly occurs in the head and neck area for many patients and, importantly, Flexitouch touch is now the only device of its kind on the market that's cleared for use in this indication. In the weeks following the clearance, we started a limited market release of our Flexitouch head and neck solution and we remain on track for a full commercial launch in the first half of next year.

As you can see, our performance during the third quarter was characterized by financial and operating improvement on a number of different fronts and an extension of the strong progress and notable growth that we've reported throughout 2016. Now, let me turn the call over to Lynn Blake who will review our third-quarter financial results in greater detail. Lynn?

Thanks, Jerry. Our third-quarter revenue increased $5.8 million or 35% year-over-year to $22.6 million for the quarter. As Jerry outlined, the largest contributor to the increase in our revenue this quarter was strong sales of our Flexitouch product line. Revenue from sales of Flexitouch products increased $4.8 million or 33% year-over-year to $19.4 million.

The increase in Flexitouch sales during the third quarter was due to the expansion of our sales force, increased physician and patient awareness of the lymphedema condition and increased contractual coverage with national and regional insurance payers. For the third quarter of 2016, sales of our Flexitouch products accounted for 86% of our total revenue compared to 87% of total revenue in the prior year.

In addition to strong sales of Flexitouch, we also saw contributions from Entre and ACTitouch product sales, which together, increased $1 million or 47% year-over-year to $3.2 million. Turning to our financial performance across the rest of the P&L, our gross profit increased $4 million or 32% year-over-year to $16.4 million compared to $12.4 million last year.

Our gross margin rate in the third quarter of 2016 was 72% of revenue compared to gross margin of 73% last year. The change in our gross margin year-over-year was attributable to changes in payer and product mix. Operating expenses increased $4.5 million or 41% year-over-year to $15.4 million.

The increase in operating expenses was primarily driven by higher sales and marketing expenses and higher reimbursement, general and administrative expense, which increased 45% and 42% respectively year-over-year. The increases in these operating expense items were driven primarily by the expansion of our field sales team, the addition of personnel in our reimbursement operations and corporate staff functions, and incremental public company costs that did not impact our results in the third quarter of 2015.

Additionally, in the third quarter, we recorded approximately $700,000 in non-cash stock composition expense compared to approximately $87,000 in the third quarter last year. Finally, R&D expenses increased $200,000 or 17% year-over-year in the third quarter. As a result of these operating expense increases, operating income decreased $500,000 or 33% year-over-year to $1 million in the third quarter of 2016 compared to $1.5 million last year.

Operating margin decreased to 4.3% of revenue in the third quarter of 2016 compared to 8.7% of revenue last year. Adjusted EBITDA increased $163,000 or 9% year-over-year to $1.9 million compared to $1.8 million last year. We have included a reconciliation of our adjusted EBITDA in our earnings release.

GAAP net income for the third quarter was $500,000 or $0.04 per diluted share compared to GAAP net income of $900,000 or $0.18 per diluted share last year. Net income attributable to common shareholders was $169,000 or $0.01 per diluted share compared to income of $144,000 or $0.03 per diluted share last year.

Net income attributable to common stockholders includes the accrual of convertible preferred dividends of $224,000 compared to $470,000 last year as well as the allocation of undistributed earnings to preferred stockholders of approximately $99,000 compared to $262,000 last year. Weighted average shares used to compute net income per diluted share were 13.9 million shares and 4.8 million shares for the third quarter of 2016 and 2015 respectfully.

Turning to our revenue guidance expectations, which we updated today in our earnings release, for the fiscal year ending December 31, 2016, we now expect total revenue in the range of $79.5 million to $81.5 million, representing growth of 26% to 30% year-over-year compared to total revenue of $62.9 million in FY15. Our current guidance range compares to our prior revenue guidance range of $77 million to $79 million and primarily reflects the better-than-expected growth performance that we reported during the third quarter.

For modeling purposes, for the full-year 2016 period, we would expect gross margin in the low 70% range consistent with the gross margin performance we've reported year-to-date. Adjusted EBITDA margin in the low- to mid-single-digits, which includes non-cash stock compensation of approximately $1.8 million, GAAP tax rate of approximately 50% and we will be profitable on a GAAP net income basis. With that, I'll turn the call back to Jerry for some closing remarks. Jerry?

Thank you, Lynn. Our performance so far in 2016 leaves us extremely confident in our ability to continue to grow our market share of the over $4 billion addressable market opportunity in the US alone. From a competitive standpoint, we are the only Company marketing an advanced pneumatic compression therapy device with the direct-to-patient and direct-to-provider model supported by a large and growing team of direct sales, reimbursement and payer relation professionals.

This model allows us to bypass traditional DME distributors, to form direct relationships with patients, payers and the clinicians, and capture additional margin on our product sales. Our payer relations and reimbursement teams are truly differentiated in the space as they are exclusively focused on working to take the burden of reimbursement from practitioners by billing and collecting payments from payers directly.

Our reimbursement expertise and the direct contracts that we have in place with payers have allowed us to maintain an average payer approval rate in excess of 80%. This represents one of the core advantages of our commercial strategy. In addition to the strategic advantages of our commercial infrastructure, we are confident that we published more clinical evidence for the therapeutic and economic benefits of our products than any company in our market.

With the proceeds of our recent IPO, we will continue to invest in enhancing some of the core areas that differentiate our strategy, expanding our direct sales and reimbursement groups, and continuing to invest in new product indications and clinical publications. We will also continue to evaluate opportunities to sell our products into international markets.

These investments will allow us to maintain our market leadership position in lymphedema and chronic venus insufficiency by enabling us to expand our addressable patient population while further penetrating the market. In addition to driving the growth of our existing products in our current markets, we will also continue to explore new ways to leverage the capabilities and expertise of our direct sales and reimbursement teams by identifying complementary technologies to add to our portfolio and by expanding our sales coverage outside the United States.

It conclusion, we at Tactile Medical believe that by working to deliver on these near- and long-term elements of our growth strategy, we will continue to grow into a globally recognized provider of home care based solutions for patients struggling with the challenges of chronic disease.

We believe that our focus on the objectives that we've outlined on today's call will allow us to continue to benefit payer organizations with improved cost savings for patients with these chronic diseases, streamline the efforts of practitioners seeking to provide effective treatment, and prove the well-being and quality of life of our patient customers and generate attractive returns for our shareholders.

I would like to thank everyone on today's call for their interest in Tactile Medical as well as our employees and investors for their support of our continued success. This concludes our prepared remarks for this afternoon. Operator, we will now open the call for questions.

(Operator Instructions)

Matt O'Brian from Piper Jaffray.

Afternoon, thanks for the question and a great quarter. Just to start off in Q4 with guidance that you provided, it is looking like it is at the midpoint of the range. It's about 31% of your full-year revenues. I think as you went through the IPO process it was pretty clear that Q4 was your strongest quarter typically: 34% to 38% of sales. So I love to hear a little bit about why the view on Q4, how much of it is just you being conservative. And then you talked about being a 20%ish topline grower. You're going to really difficult comparisons heading into next year. Should we still think of you as a 20% grower even next year, or just with the more challenging comps on a two-year average -- but maybe a little less than that on the top line next year?

Thank you, Matt, I think that was a couple questions, but we will try to fill both of them as best we can. First on the guidance, as you can imagine we are very pleased with the 34% growth year-to-date.

Our original guidance range of $77 million to $79 implied about $45 million in revenue in a second half of 2017 at the midpoint. Our updated range implies about $47 million in the second half at the midpoint. We have a number of reasons we are excited about the fourth quarter. But I think one of the things that you need to appreciate is that this new range includes the fact that our fourth quarter has actually traditionally been a little slower for us. So if you look back to Q4 of 2015 we grew the business about 17% last year in the fourth quarter.

We have a dynamic in our business where the sales force is actually revisiting patients that have come into a backlog of our business related to their out of pocket deductibles and copayments. We actually started a process a little earlier this year to try to reach back to patients who actually had approvals for our device, but couldn't make the copayment obligations early in the year. And as their healthcare expenses continued throughout the year, now their deductibles are at a much lower rate.

So that does require that our field force chance old orders, if you will, and keeps them from being focused on new orders or new customers. We're very confident in very pleased with the guidance we've given and feel very good about what we are able to deliver this year.

The follow-up was just as far as having a pretty difficult comparison heading into 2017, and I will admit myself to this question, what will the combination of more productivity from the sales force plus the head and neck indication -- maybe you could kind of layout how that's going to impact your business going forward -- be enough to keep you at that 20% type growth rate that you've talked about?

Yes Matt, I think that's a really good question since we are on such a great trajectory in 2016. We are not really getting formal many 2017 guidance on this call. We will update that as part of our Q4 call to give you the formal guidance.

We do believe that tactile is a 20% topline grower with gross margins in the low 70% in the commitment to GAAP net income profitability. You should continue to think about us in those terms.

Just on the head and neck side, how do we think about that impacting the business going forward? Thanks. The head and neck release, we actually got clearance from FDA on that little earlier than anticipated and went right into our garment limited market release.

What we are looking for there is to get some field experience from both clinicians and patients to prepare ourselves to be able to address questions that come out of clinicians and patients, as well as get some reimbursement experience so that when we are ready to go into full commercial launch we have a very clear understanding of how it is going to be paid. We don't anticipate any revenue impact in the fourth quarter and again we will provide a little bit more clarity on the formal guidance that we give on the Q4 call. Thank you.

Margaret Kaczor from William Blair.

Good afternoon guys.

Hello, Margaret.

First question for me, Jerry, you talked previously that the organization is doing a better job at finding and maybe adding new high prescribing physicians. Did you continue to see that this quarter? And as we look forward, how much deeper can you go into these accounts versus how many more of these high prescribing physicians out there? And to sneak one more in and one very long question, how much did new prescribers contribute to Flexitouch growth this quarter?

I think -- let me answer the second question first and then I will get back to trying to articulate better our experience with the high diagnosing clinicians. I think the largest drivers of our success in the third quarter were the fact that we continue to invest in our sales force and the number of reps that we brought on is very consistent with what we have said before.

You will notice in the 10-Q reference to more than 110 full-time employees now in our field organization. So sales force investment is probably the biggest growth driver. The focus piece is really what gets to the first part of your question. We have been focusing the field organization this year on -- three areas of current customers that are high prescribers for us.

New high diagnosing clinicians that gets specifically get specifically to the question that you asked and the Veterans Administration hospitals, where we have had a very strong success this year. So we believe we just scratched the surface on these high diagnosing clinicians.

I mentioned during our last update that we see these customers actually ordering significantly more products per customer than are traditional accounts and as one of the reasons that we are so excited about continuing to go after these high decile, high diagnosing clinicians. So I hope that that got at the questions that you were asking.

Sure, as that one more in there. So how much new prescribers ended up contributing to growth as it relates to this quarter?

We don't really segment those orders have come in yet, so I don't really have a way to answer that for you. I think because it is such a focus for the sales organization, we do have them very engaged with reaching out to those clinicians. But I cannot really put a number on the contributions in the third quarter.

Maybe one last one for me. I know you guys had referenced the one 10 in the tenth 2Q. But can you give us an update roughly of how many of those are Specialist our Associates and would you be willing to a maybe accelerate the hiring plan given the strong success and above expectations success that you guys have had so far? Thanks.

You bet, Margaret.

We continue to plan on increasing the sales organization at the pace of about 20 to 25 a year. We have been sticking to about half of those as Associates and half of those as product Specialists.

The product Specialist hires that we experienced this year have tended to be promotions from the associate ranks into product Specialist roles where they get their own territory and a step up in quota. We are tracking to exactly what we said we would do this year and this environment we are trying to continue to bring on the right people. We think the 20 to 25 per year is the correct strategy in terms of the number that we want to bring on and get trained to productivity.

Great, thanks.

(Operator Instructions)

Jason Mills, Canaccord Genuity.

Super, thanks, can you hear me okay?

Hello, Jason.

Congrats on a fantastic quarter and your first conference call, Jerry. I wanted to go back to your is custom out high diagnosing docs. I think four investors have actually accessed this call and tried to ascertain the market opportunity. You gave them a big, big number that I think they can get excited about, obviously. But perhaps you could from that number or that number differently. Specifically, the target addressable market for high diagnosing lymphedema docs in this country, and where you are currently with respect to tapping into that group of high diagnosing physicians?

So the data that we pulled last year identified about 820,000 patients that were diagnosed with Lymphedema. There were well over 100,000 clinicians who had submitted those claims.

The high decile accounts, those that are basically seeing the most of these patients, have been the source of our targeting so far. So far we really just begun to tap into what we are calling the top three deciles of that group. So I would estimate we have maybe penetrated 15% of those.

In a still significant opportunity to continue to find those clinicians who are that diagnosing these patients and to convince them that there is a way they can be involved in their treatment, not just diagnosing these patients. It has been a driver for our excess so far this year. We expect it to continue as we move into 2017, as well.

That's helpful, Jerry, thanks for that. That helps frame a bit. Let me go back to Matt's question about guidance.

This is a question you get when you have a great quarter and raise your guidance a little bit; perhaps not as much as you saw in the growth coming in the third quarter. So as I look at back Jerry over the last four years. Now we have four years of data just in terms of how your business flows sequentially and it has been very consistent.

It is quite amazing to see the sequentially you have a big jump somewhere between 45 and 60% the last three years or four years in the first to second. And then the growth from second to third is high single-digits, low double digits, pretty consistently frankly. And then the third and fourth quarter job as been anywhere from looks like 26% last year was the lowest and 52% the year before 38%, So somewhere between 25 and 50% and to get to the midpoint, as you know, is more like high single-digits growth sequentially.

So that's just the map so a long-winded question, but clearly the guidance looks conservative unless there is something specific sequentially this quarter that you would like to call out?

So last year in the fourth quarter we grew the business 17% as opposed to looking back for the year before. If you average the two-year growth two years instead of just last year, it is 14%.

Three years it is 21% so this fits into that band we are describing for the fourth quarter, what the implied fourth quarter growth rate is of anywhere between 11 and 20% year-over-year.

Keep in mind that annual guidance that we are talking about is going from a low 20s, which is where we said we would be as a Company to anywhere between 26 and 30% year-over-year. So I'm not -- there aren't too many med-tech companies that are putting up those kind of numbers at this point.

No question. The question comes the question comes from a place of complement, hard stop Jerry, absolutely given the performance.

Just trying to ascertain, either A, if this guidance is conservative and I can understand the tendency to be conservative in this mid-tech case, or B, if there's something -- the third quarter was very strong. So does that make the sequential Q3 to Q4 hope different than the trends we've seen, like I said, over the last three years, sequentially Q3 to Q4 last years, is 38%, if 52% and 26%, and this, at the high end range would be more like 11%.

So I just wanted to know if there's anything -- if the third-quarter strength is contributing to maybe a little less sequential growth or if there's anything else I'm missing, that's all.

That's really good question and a good observation, Jason. Their original guidance range we gave of $77 million to $79 million actually implied about $45 million in a second half of the year. One of the phenomenons I described before was the fact that we have patients who end up refusing our equipment early in the year because the copayments and deductibles are too high.

And we revisit those as we go through the year. This year we actually started in the third quarter owing back to these patients, rather than waiting until the fourth. The second half numbers still pretty healthy in terms of year-over-year performance, but some of it -- I don't want to say pulled in, we accomplished in the third quarter rather than in the fourth quarter.

The other phenomenon we are seeing is that we basically had a large payor come on as an in network provider in the third quarter. And what that does is there's usually a bolus of patients, or a backlog of patients that have that payor as their provider, or as their insurance Company. Once we become in-network we actually can go back to those patients and tell them as a new network provider, their copayment or deductible amount is much lower than it would have been with us out-of-network. That tends to push some of that volume that we or maybe expected to happen in Q4 into Q3. So --

That's terrific help. That explains it exactly and congratulations on a terrific quarter.

Thank you.

There are a number questions in queue. That does conclude our comments were with today. Thank you for your participation.