Q3 2024 Tactile Systems Technology Inc Earnings Call
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How do I even put this back?
Speaker Change: Please stand by. Welcome, ladies and gentlemen, to the 3rd Quarter 2024 Earnings Conference Call for Tactile Medical.
Speaker Change: 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.
Speaker Change: I would now like to turn the call over to Sam Bentzinger, Investor Relations at Gil Marning Group.
Sam Bentzinger: for a few introductory comments. Please go ahead. Good afternoon, and thank you for joining the call today. With me from Tactile's management team are Sheri Dodd, Chief Executive Officer, and Elaine Birkemeyer, Chief Financial Officer.
Sam Bentzinger: 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, which could cause actual results to differ materially from those indicated.
Sam Bentzinger: including those identified in the risk factor section of our annual report on Form 10-K as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission.
Sam Bentzinger: Such factors may be updated from time to time in our filings at 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.
Sam Bentzinger: This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP.
Speaker Change: We generally refer to these as non-GAAP financial measures.
Speaker Change: Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. With that, I'll now turn the call over to Sheri.
Sheri Dodd: Thanks, Sam. Good afternoon, everyone, and welcome to our third quarter 2024 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer.
Sheri Dodd: Today we will review our financial results for the third quarter, discuss evolving market dynamics across our business, and provide progress updates on each of our three key ongoing commercial initiatives.
Sam Bentzinger: As a reminder, these initiatives cover technology and workflow-related investments in sales and order operations, the development and launch readiness of our next-generation lymphedema platform, and the generation of clinical evidence to support further patient access to our platform.
Sam Bentzinger: We will also provide an update on our full year 2024 Revenue Guidance and Capital Allocation Strategy.
Speaker Change: Total revenue in the third quarter grew 5% year-over-year to $73.1 million.
Speaker Change: In our lymphedema business, revenue increased 4.4% year-over-year to $65.3 million, and airway clearance revenue increased 10.3% year-over-year to $7.8 million.
Speaker Change: Our growth margin increased 410 basis points year-over-year. Margin expansion was primarily a result of lower material costs and warranty expenses, resulting from improvements in the design of our products over the past several years.
Speaker Change: Adjusted EBITDA grew 39.3% year-over-year in Q3, representing the 10th consecutive quarter of year-over-year improvement and reflecting our commitment to delivering continued improvements in operating leverage.
Speaker Change: From a cash perspective, cash and cash equivalents increased sequentially by $8.5 million, increasing our cash balance to $82.1 million as of September 30, 2024.
Speaker Change: The sequential growth in both adjusted EBITDA and cash balance are indicative of our operational maturity and continued focus on balancing profitability and cash generation with investments in our business.
Speaker Change: While pleased with our third quarter performance across key multiple metrics, our revenue results were below our expectations due to a confluence of two main factors.
Speaker Change: During the third quarter, we saw strong execution in our mitigation activities. However, growth in the lymphedema business was impacted to a slightly greater extent than originally expected. In our airway clearance business, we continued to see year-over-year growth, but DME buying patterns led to uneven results.
Speaker Change: From a business fundamentals perspective, we continue to see strong patient and clinician demand for our products. We are taking a concerted approach to fortifying our sales channels, simplifying our front and back office work through technology modernization, and amplifying the voice of our patients and providers through product and service innovation.
Speaker Change: Driving further revenue growth and shareholder value remain top priorities and I'm confident in our ability to do so while sustaining our track record of strong bottom line performance.
Speaker Change: With that backdrop, let's review the respective business line performances, beginning with Lymphedema.
Speaker Change: Today, I'll focus our lymphedema discussion on two main topics. First, a review of our Q3 performance, particularly relative to Medicare channel dynamics, and second, an encouraging update on the recent major policy announcement from CMS regarding changes to the coverage policy for pneumatic compression devices.
Speaker Change: As a reminder, on our Q2 earnings call, we discussed revised expectations for the full year 2024 to account for the unexpected change in the Medicare Administrator's interpretation of the 2015 LCD for pneumatic compression devices, or PCDs, and the associated increase in documentation collection required for complete claims.
Speaker Change: For Tactile, the sourcing responsibility for this added documentation falls on our sales reps, who work with the prescribing clinicians to collect the required details.
Speaker Change: As a reminder, our sales reps have call points across vascular practices, vein centers, oncology, and lymphatic therapists who treat patients across government and commercial payers.
Speaker Change: Because our sales reps support all patients, regardless of insurance type, the increased burden on this Medicare documentation gathering impacts our reps' productivity as a whole.
Speaker Change: While this disproportionately impacts claims for Medicare patients, it also impacts sales activities across all channels.
Speaker Change: to be clear.
Speaker Change: While the additional documentation collection tends to extend the timeline from order completion to product shipment and claim submission, it has not resulted in a higher rate of claims denials. We have also not seen an increased number of post-payment Medicare audits. Our collection across channels remains strong, as evidenced by our sequential cash generation.
Speaker Change: Despite this increased documentation requirement for Medicare patients, lymphedema sales grew 4.4% year-over-year in the quarter and were roughly flat on a sequential basis.
Speaker Change: With a full quarter of experience now dealing with the changes in LCD interpretation, we've gained much greater insight into how exactly these dynamics are playing out in our revenue cycle management results and have seen our strategies working to mitigate the full impact of this policy turbulence.
Speaker Change: Specifically, we've modernized and expanded customer facing and internal facing workflow related tools. For example, we have migrated to a more efficient electronic method of verifying patient insurance and launched our previously piloted e-prescribing tool nationally to help streamline the prescriber experience with required data collection.
Speaker Change: We've received positive feedback on the e-prescribing tool, and we are seeing strong adoption through these early days of national launch. Importantly, we will continue to update this tool to remain current with coverage policies, further mitigating the administrative burden on providers and our sales reps.
Speaker Change: Further indicative of our strategy to leverage new technologies to drive efficiency, we also accelerated the implementation of select tools from our new CRM, which we plan to fully deploy in early 2025.
Speaker Change: These tools have better equipped our sales reps to best organize and prioritize their work so they can be as efficient as possible.
Speaker Change: From an internal people and process perspective, we redesigned and streamlined various internal business processes to enhance speed and efficiency in order operations. With respect to our human capital, in Q3, we redeployed portions of our back office resources to work directly with the sales reps and patients to support timely documentation gathering and patient engagement.
Speaker Change: We also added incremental contractor resourcing to assist with documentation efforts.
Speaker Change: Finally, we continue to make progress with increasing the percentage of in-home patient demos that are performed by our patient education consultants, also known as PECs.
Speaker Change: This quarter, 48% of in-home demos were performed by our PECs versus 45% in Q2, and up from 30% at the end of 2023.
Speaker Change: We are pleased with this continued growth and continue to expect our PEC staff to complete at least 50% of in-home demos by the end of 2024.
Speaker Change: Regarding sales headcount, we ended the third quarter with 270 reps up from 264 at the end of the second quarter and within our target range for the full year.
Speaker Change: Our lymphedema channel mix was also a positive story in the third quarter. Despite aforementioned impact on the overall cells rep productivity, our VA and commercial sales demonstrated strong growth in the quarter, reflecting solid underlying fundamentals in both channels.
Speaker Change: both grew double digits year-over-year with commercial up over 20 percent.
Speaker Change: Strengthen the VA channel was particularly impressive with 16% year over year growth driven exclusively by FlexiTouch and aided by the recent publication of positive clinical trial results for veterans using FlexiTouch versus standard of care.
Speaker Change: Collectively, these tools and process enhancements, combined with human capital investments and strong underlying demand for our products, leave us confident in our ability to build momentum through Q4 and into 2025.
Speaker Change: With that context on the third quarter performance, I want to pivot to an encouraging upcoming change in the Medicare coverage policy for PCDs.
Speaker Change: Last month, CMS announced that the current LCD policy will be retired as of November 14, 2024, and that the existing National Coverage Determination, or NCD, will instead be the sole coverage policy in effect.
Speaker Change: We view this as a win for lymphedema patients and a positive for our business.
Speaker Change: As brief context, the NCD policy for PCDs was established in 2002 and Tactile followed that policy until 2015 when MACs established their own LCD and began adjudicating claims under a more stringent policy, which, for example, defined specific reimbursement eligibility requirements for basic versus advanced PCDs.
Speaker Change: Since the creation of the LCD, the NCD and the LCD policies have coexisted with some similar sets of requirements, but also some areas of conflict, particularly in terms of coverage eligibility for FlexiTouch.
Speaker Change: The LCD required the patient to try a basic pump before receiving an advanced pump, even if the basic pump did not meet the advanced clinical needs of the patient.
Speaker Change: Tactile adjusted our internal claims processes and related documentation requirements to the LCD. And we've continued to refine and adapt our approach based on the MAX evolving adjudication patterns.
Speaker Change: With the retirement of the LCD in mid-November, the MACs will adjudicate claims moving forward based only on the NCD. This provides for greater flexibility to consider case-by-case patient needs, including initiating PCD therapy for Flexi-Touch, if clinically supported.
Speaker Change: In short, this is a positive for tactile and for patients.
Speaker Change: Coverage policy changes can create disruption but in the case of this change we are optimistic. We have over a decade of experience submitting claims under the NCD including extensive adjudication history, audits, and knowledge of where there is ambiguity in the NCD policy language.
Speaker Change: As needed, we can quickly adapt the e-prescribing tool, mobilize training and education for our sales force and clinician partners, and implement claims processing adjustments while monitoring success rates.
Speaker Change: As stated earlier, the NCD policy does have some language ambiguity. If they choose, the MACs can continue to apply their own interpretation of the NCD policy, which may be similar to their current LCD position.
Speaker Change: Ultimately, we believe the change to the NCD will be good for patient therapy access and we'll be monitoring adjudication behavior and advocating for patients as clinically appropriate.
Speaker Change: In summary, we expect the recent turbulence associated with the lymphedema LCD coverage policy interpretation to diminish in the near and medium terms.
Speaker Change: With the change to a sole NCD policy, we believe the dynamics that negatively impacted Medicare channel sales directly and commercial channel sales indirectly in Q2 and Q3 will improve moving forward.
Speaker Change: While total retirement of the LCD was unexpected, we are pleased with the MAPS decision and believe the elimination of the conflicting policies represent a patient-friendly change that will make it easier for Medicare patients to gain access to life-changing treatment options for their lymphedema.
Speaker Change: As the market leader, we have worked closely with the MACs, CMS, and professional societies for years to lead societal advocacy initiatives and industry coalitions which have pushed for policy changes.
Speaker Change: We feel this is our responsibility as the leader in this space, and I'm proud of the work our entire team has done every step of the way to help influence this policy change.
Speaker Change: Turning now to a review of airway clearance, sales of AfloVest were up on a year-over-year basis but down sequentially, as expected due to seasonal dynamics.
Speaker Change: While bronchiectasis itself is not strictly seasonal, it is influenced by seasonal changes and the associated increase in respiratory illnesses like allergies, the cold, and flu, which are most prevalent in November through May.
Speaker Change: beyond these seasonal dynamics.
Speaker Change: Our performance was also affected by uneven buying patterns across a handful of our DME customers.
Speaker Change: We remain encouraged that there is a large number of bronchiectasis patients that are undiagnosed and undertreated. Our airway clearance sales organizations are the experts in educating and training our D&E sales partners and providers in bronchiectasis and the role of AfloVest in their care.
Speaker Change: We continue to believe that AfloVest is a compelling, differentiated offering for these patients.
Speaker Change: As mentioned earlier, we had several bright spots in the quarter both operationally and financially that demonstrate continued momentum with respect to profitability, leverage, cash generation, and growth in our VA and commercial channels.
Speaker Change: That said, the cumulative effect of Q3's challenges within the Medicare channel and airway clearance business have led us to further revise our revenue guidance for 2024. We now expect total revenue in the range of $292 to $295 million.
Speaker Change: On the profitability side, as mentioned, we continue to deliver year-over-year increases in adjusted EBITDA and expect that strength to continue. And as a result, we are raising our guidance for adjusted EBITDA to a new range of $35 to $37 million.
Speaker Change: We have several reasons to be optimistic in our ability to close out the year strong from a revenue perspective. Q4 is typically the strongest quarter for our lymphedema business due to patient copays being at the lowest at any point during the year.
Speaker Change: As shared, we are still in strong execution mode of our current commercial initiatives. We are investing and deploying technology and workflow-related improvements, including the national rollout of e-prescribing and increasing PEC and back-office support to perform non-selling administrative activities.
Speaker Change: We publish strong clinical results which support the value of Flexi-Touch versus standard of care. And our launch of Nimble is generating enthusiasm among clinicians and patients.
Speaker Change: As many of you are aware, NIMBL is the next generation of our basic PCD and an important addition to our leading portfolio of patient-focused, clinically proven lymphedema therapy solutions.
Speaker Change: The first phase of Nimble's introduction to the market is targeted specifically for upper extremity treatment, a patient group dominated by breast cancer survivors.
Speaker Change: In fact, up to 40% of breast cancer survivors are affected by lymphedema, and they are often surprised and unprepared to learn that after going through the ordeal of breast cancer treatment, they now have been diagnosed with a new, lifelong, chronic progressive disease with no cure.
Speaker Change: For these patients, the constant swelling and discomfort of the breast, trunk, arms, and hands limits mobility, activity, and travel. It is difficult and time-consuming to treat, and patients seek a more convenient option that reduces the physical and physiological burden of treatment while still providing the best therapy possible. They now have that with Nimble.
Speaker Change: From a design and feature perspective, Nimble is 68% lighter, 40% smaller, and uses 33% less hosing than our previous generation device.
Speaker Change: Nimble's compact design is the smallest PCD of its kind, making it an ideal therapy for daily use at home or on the go.
Speaker Change: In addition to these patient-centric design features, Nimble also offers connectivity to our free Kylie digital application, providing patients a more simple way to track their usage and change in symptoms, and to share results with their care team.
Speaker Change: Early feedback from patients and clinicians has been positive as both groups appreciate this compelling treatment option designed to increase adherence and improve clinical outcomes.
Speaker Change: Patients specifically value the connectivity to Kylie and its role in aiding increased therapy engagement. We are excited about this new platform and we'll be expanding Nimble to include patients with lower extremity conditions in the first half of 2025.
Speaker Change: From a clinical evidence perspective, in September, we announced the publication of positive clinical trial results among VA patients that assess the use of PlexiTouch.
Speaker Change: for the treatment of their lower extremity lymphedema over the course of one year.
Speaker Change: This was the largest prospective clinical trial investigating PCDs and lymphedema ever published in the U.S., and the results demonstrated significant improvements across primary and secondary study endpoints, including increases in lymphedema quality of life scores, reductions in limb girth, cellulitis events, and increased risk of heart disease.
Speaker Change: skin hyperpigmentation and high compliance with therapy.
Speaker Change: Further, mild lymphedema was the most common disease stage among this study group, presenting in 68% of patients.
Speaker Change: This is important as it shows the value and clinical efficacy of Flexi-Touch earlier in the care pathway.
Speaker Change: Our ongoing RCT assessing flexi-touch for head and neck lymphedema is also progressing well and remains on track for an initial data readout in early 2025. This is the largest study ever conducted among this patient group and we look forward to communicating the results as soon as we are able.
Speaker Change: Thank you. Thank you.
Speaker Change: Delivering speed and efficiency in the sales and order management process, launching and supporting innovative therapies and solutions, and generating peer-reviewed evidence and patient advocacy supports are foundational elements for improving access to care.
Speaker Change: Having served over 1 million patients since Tactile's inception, improving access to care continues to be a focus of our work today and will become an even more important cornerstone of our strategy in the future.
Speaker Change: We look forward to sharing specifics of this refreshed access to care strategy next quarter. In the meantime, we are encouraged by our demonstrated momentum in this area to date and pleased to have a strong balance sheet to support appropriate future investments.
Speaker Change: Before turning the call over to Elaine, I want to share a brief update on our capital allocation strategy. As communicated during the previous earnings call and mentioned earlier in my prepared remarks, we are increasingly benefiting from generating free cash flow, a trend we expect to continue.
Speaker Change: This provides us the luxury of continuing to evaluate various investment opportunities to drive growth and increase shareholder value, while also initiating a share repurchase program of up to $30 million of outstanding stock.
Speaker Change: We believe the strategic action and near-term use of cash aligns with our conviction in the trajectory of our business, as well as our ability to execute our financial and operational initiatives.
Speaker Change: To be clear, our strong balance sheet affords us a multitude of options in terms of meaningful capital deployment, and we will continue to evaluate ways to leverage our market leadership and strong commercial and operational footprint to invest in and drive incremental growth.
Speaker Change: With that, I'll now have Elaine review our third quarter financial results and provide an update on our outlook for the remainder of 2024.
Elaine Birkemeyer: Thanks, Sheri. Unless noted otherwise, all references to third quarter financial results are on a gap and year-over-year basis.
Elaine Birkemeyer: Total revenue in the third quarter increased $3.5 million, or 5%, to $73.1 million.
Elaine Birkemeyer: By product line, sales and rentals of lymphedema products, which includes our Flexi Touch and Entrez system, increased $2.8 million, or 4%, to $65.3 million.
Elaine Birkemeyer: and sales of our airway clearance products, which includes our AfloVest system, increased $0.7 million or 10% to $7.8 million.
Elaine Birkemeyer: continuing down the panel.
Elaine Birkemeyer: Gross margin was 75% of revenue, compared to 70.9% in the third quarter of 2023.
Elaine Birkemeyer: non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 75.4% compared to 71.4% in the prior year.
Elaine Birkemeyer: The increase in non-gap growth margin was attributable primarily to lower manufacturing and warranty costs, and improving collections reflected in our revenue.
Elaine Birkemeyer: Third quarter operating expenses increased $6.6 million, or 16% to $48 million. The change in GAAP operating expenses reflected a $0.8 million increase in sales and marketing expenses, a $0.5 million increase in research and development expenses.
Elaine Birkemeyer: and a $1.7 million increase in reimbursement, general and administrative expenses, including and primarily driven by strategic technology investments.
Elaine Birkemeyer: and a $3.7 million one-time earn-out benefit that occurred in the prior year related to the final trip of our earn-out liability related to the AppleBest acquisition.
Elaine Birkemeyer: Operating income decreased 1.2 million dollars or 15% to 6.8 million dollars.
Elaine Birkemeyer: Non-GAAP operating income increased $2.7 million, or 50%, to $7.9 million. As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and earn out expense, as well as certain non-reoccurring operating expenses.
Speaker Change: We provided a detailed gap-to-non-gap reconciliation in our earnings press release.
Speaker Change: Other income net increased $0.9 million or 225% to $0.5 million.
Speaker Change: The increase was primarily driven by higher interest income on our increased cap position and lower interest expense primarily driven by the retirement of a revolving line of credit at the end of 2023.
Speaker Change: Income tax expense increased $16.8 million, or 116% year-over-year, to $2.1 million.
Speaker Change: The year-over-year change in income tax is driven primarily by a one-time adjustment in the prior year releasing of our valuation allowance. This non-cash impact reflected our return to more consistent profitability. The current year expense is driven by our taxable income.
Speaker Change: Net income decreased $17.1 million to $5.2 million, or $0.21 per diluted share, compared to $22.3 million, or $0.94 per diluted share.
Speaker Change: Non-Gap Net Income decreased $14.2 million, or 70% to $6 million, compared to $20.2 million. As mentioned, this decrease is driven by the impact the prior year valuation allowance relief had on prior year income tax.
Speaker Change: Adjusted EBITDA increased $10.7 million or 14.6% of sales compared to $7.7 million or 11.1% of sales.
Speaker Change: with respect to our balance sheet.
Speaker Change: We had $82.1 million in cash and cash approval, and $27 million about standing borrowings at quarter end. This compares to $61 million in cash and $29.3 million of outstanding borrowings as of December 31, 2023.
Speaker Change: Our cash growth was driven by a combination of operating income and an increase in net working capital.
Speaker Change: Turning to a review of our 2024 Outlook.
Speaker Change: For the full year 2024, we now expect total revenue in the range of $292 to $295 million, representing growth of approximately 6% to 8% year-over-year.
Speaker Change: This compares to previous 2024 total revenue guidance in the range of $293 to $298 million, representing growth of approximately 7% to 9% year-over-year.
Speaker Change: Our updated guidance reflects the impacts we are seeing from Medicare's increased documentation requirements and the D&E buying patterns within airway clearance that Sheri discussed earlier.
Speaker Change: For 2024 total revenue guidance range, it seems that the growth in both our lymphedema and airway clearance products will be in a similar range.
Speaker Change: For modeling purposes for the full year 2024, we now expect our gap growth margins to be approximately 74%.
Speaker Change: our GAAP operating expenses to increase low double digits as we advance our tech-related investments throughout the year, net interest income of approximately $1 million, a tax rate of 30%, and a fully diluted weighted average share count of approximately 24 million shares.
Speaker Change: As a result of our continued progress with improved profitability, we now expect to generate adjusted EBITDA of approximately $35 to $37 million in 2024. This compares to previous adjusted EBITDA guidance of $34 to $36 million.
Speaker Change: are just-at-Ibida expectations.
Speaker Change: assume certain non-cash items, including stock compensation expense of approximately $8.4 million.
Speaker Change: and tangible amortization of approximately 3.8 million dollars and a depreciation expense of approximately 3 million dollars.
Speaker Change: With that, I'll turn the call back to Sheri for some closing remarks. Sheri?
Sheri Dodd: Thanks, Elaine. In closing, my confidence in our team and our business remains high. Our market opportunity is large, growing, and underpenetrated, and Tactile brings the largest breadth of clinically proven solutions for our patient population from head to toe.
Speaker Change: Meanwhile, we are fortifying our business operations for scale, simplifying the patient, provider, clinician, and employee experience, and are amplifying the voice of the patient in our policy and payer advocacy, as well as seeing improving CMS coverage conditions in the near horizon.
Speaker Change: These efforts will continue to bear fruit in the coming quarters and years and leave us optimistic about our ability to continuously adapt, grow, and profitably scale. With that, Operator, we'll now open the call for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Speaker Change: and Sam Bentzinger. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our first question comes from the line of Margaret Cascore Andrew with William Blair. Please proceed.
Speaker Change: and their families. Thank you. Thank you.
Speaker Change: Hey guys, it's Jimmy on from Margaret. Thanks for taking the question.
Speaker Change: Two for me, obviously the Medicare documentation impact didn't play out as expected this quarter. So maybe just touch on why that was a surprise relative to your expectations. And I understand you have the LCD reverting back to the NCD, but maybe just give us some more color on the level of visibility you have on Medicare sales, improving going forward.
Speaker Change: Sure, thanks so much and thanks for joining. You know, I think the best way I can answer this really comes in two parts. I mean, the first is...
Speaker Change: From a good news standpoint, we did not see the Medicare max get any more strict than they had been as we saw that transition happening from Q2 into Q3. So it didn't get worse.
Speaker Change: What we did, though, learn is with the full quarter under our belt, we really understood more about what was it actually going to take in order to...
Speaker Change: to get the documents.
Speaker Change: and that was both in terms of what was required from the sales reps and how we could
Speaker Change: I think we went in with Q3.
Speaker Change: So, it impacted our Medicare business, of course, and you saw that reduction, but it also impacted our VA and commercial businesses.
Speaker Change: and yet we saw double-digit growth in both of those. So we know that the market dynamics are there, the fundamentals for the market are there, the patients are there. It just took longer than we had anticipated to gather all that documentation to move our orders through the queue and out to shipping.
Speaker Change: Thank you, everyone. Thank you, everyone. Thank you.
Speaker Change: Okay, that's helpful. And then maybe just the second one on guidance here, you know, you lowered guidance by less than the miss, you know, 2 million roughly at the midpoint. So I guess maybe what are you assuming Q4 that's giving you confidence that, you know, you can lower by less than the miss? And then are you baking in any contribution from NIMBLE or maybe you just touched on it, but is most of that improvement stemming from, you know, the Medicare documentation impact lessening, you know, in Q4 stepping down and then potentially exiting the year?
Speaker Change: We're really excited about the impact it's had thus far. We were able to launch it on time with the Breast Cancer Awareness Month, but we don't expect that to have a material impact on Q4.
Speaker Change: We also know that the change from the LCD to the NCD is only going to go effective on November 14th and any orders that are in the queue right now are going to be adjudicated under the LCD not the NCD. So we also don't expect the change to the NCD itself
Speaker Change: accelerated tools from our CRM out into the sales force, the way that we have deployed and redeployed headcounts for order operations, the way the successes of taking our e-prescribing pilot into a national launch, all of these factors from technology and people and process, we now have a lot of experience for what it looks like to operationalize under the Medicare stricter requirements and we've seen the impact in progress of those initiatives.
Speaker Change: With that already seeing momentum in Q3, we're going to see more of that full momentum in Q4. And quite honestly, on into 2025, many of the initiatives that we put in place are now going to be our standard practice. And so that's what gives us confidence for a Q4, at least stabilizing Medicare, seeing return to growth, and continuing to take advantage of our strong market presence in both commercial and VA businesses.
Speaker Change: That's very helpful. Thanks for taking the question.
Speaker Change: You bet. Thank you very much.
Speaker Change: Send our best to Margaret.
Speaker Change: Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed.
Speaker Change: Hi everyone, this is Izzy on for Ryan tonight, but thanks for taking the questions
Speaker Change: Hi, we're about a year or almost a year out from when the Lymphedema Treatment Act was enacted back in January So I was just wondering if you guys are starting to see any benefits from that or more patients starting to come into the funnel
Speaker Change: Yeah, it's a great question. You know that policy...
Speaker Change: What's interesting about this, or just to make sure that everyone's kind of grounded, for patients to get a garment through the LTA, they still need to get the diagnosis of lymphedema, and we know that takes a while for a patient to ultimately get that diagnosis.
Speaker Change: They have to have the physician visit where measurements need to be taken.
Speaker Change: There needs to be documentation in the medical record to some degree of medical necessity, and they have to get the prescription. So there still is a process that's evolved with the patient being able to take full advantage of the LTA from that reimbursement standpoint, but we are starting to see and hear about those coming through. While we're not seeing impact fully in the pumps, we know that that's going to start trickle through as patients both become more aware of the LTA policy, physicians, prescribers become more aware, they're able to get the documentation in place, get the claims approved.
Speaker Change: use the garment for a conservative trial, and then if those patients fail, then they move on to an opportunity of being in the PCD area.
Speaker Change: Yes, we understand that it's starting to gain momentum. No, not material to our business to date, but we're excited. We know this is the right thing to do for patients, and we're ready and helping to support patients as they transition from conservative therapy into pump therapy.
Speaker Change: Got it. That's really helpful. Thank you. And then I know there's a lot of moving pieces with all of the documentation requirements and kind of the headwinds that we're facing right now, but as we start to think about 2025, do you see the opportunity for these headwinds to kind of start to subside and get to a more normalized rate once...
Speaker Change: the e-prescribing tool is more broadly ruled out at a national level, or do you think we'll still face some challenges as we move into next year?
Speaker Change: Yeah, it's such a good question because policy changes do create a degree of turbulence. As I said in Q2, it mentioned a little bit in the prepared remarks.
Speaker Change: Where we're optimistic is that with the change from LCD to NCD, there will now just be one policy. You know, previously there had been these two policies. They were sometimes in conflict with each other.
Speaker Change: You know, we've had experience operating under both of those policies, so we believe that this change to one sole policy is the right thing for patients, and we think it's going to be good for our businesses as well.
Speaker Change: challenges on different type of documentation, et cetera. So having been there and kind of seen how this plays out, we're also feeling that this change in policy is actually gonna be less of turbulence, less headwind for us, and it creates more of a...
Speaker Change: Like a a new normal hopefully for us as we as we move forward
Speaker Change: So there's a lot of advantage of the one policy. The other thing, Izzy, that I would say and ask Elaine to weigh in as well is
Speaker Change: The mitigations that we put in place, whether it's e-prescribing and moving that from pilot to national launch or e-verify or the CRM tool that helps our reps be more efficient.
Speaker Change: It could, and you have to be prepared at any time. Like, we're ready. We are fortifying, truly, and simplifying the way we're doing our business.
Speaker Change: So I anticipate that, you know, we're going to be in a good position with the NCD coming forward. And then, you know, as policy evolves and we see how the MACs are going to adjudicate under that NCD, we'll be ready.
Speaker Change: www.cdc.gov.au
Speaker Change: Very helpful, thanks for taking the questions.
Speaker Change: Thanks, Izzy.
Speaker Change: Thank you.
Speaker Change: Thank you. As a reminder, if you have a question at this time, please press star 1.
Speaker Change: Our next question comes from the line of Kyle Bowser with B Riley. Please proceed.
Speaker Change: Hi Kyle, welcome and thanks again for picking up coverage.
Kyle Bowser: Thank you. Our pleasure and thank you for all the updates and taking my questions here.
Kyle Bowser: EBITDA expectations is great, you know, we're up, we're up with SAW.
Speaker Change: like 50% growth and non-GAAP operating income in the quarter. So despite the miss, the bump up in EBITDA for the full year, just kind of curious, how would you rank kind of the factors that are contributing to the expanding margins and kind of outpacing top line growth here?
Speaker Change: Yeah, thank you. You know, we do believe that the bottom line performance on our business sometimes is is underappreciated and and definitely It's not just a one-time event. We've been able to show
Speaker Change: You know, sequential improvement in our biome line and then of course our cash balance is in such a good place.
Speaker Change: There's a few things that are contributing meaningfully to that, I would say. On the gross margin side, product improvements have really helped kind of reduce our overall warranty costs, so that has just been great for patients and also good on gross margins. It's a manufacturing efficiency is also playing out there, so just good fundamentals from a business standpoint and for patients.
Speaker Change: On our other expenses, I'll talk to Elaine because she can walk through some of the big drivers in that area.
Elaine Birkemeyer: Yeah, I think, you know, as Sheri mentioned, you know, the biggest impact has been due to our growth margin. And if you saw, we...
Elaine Birkemeyer: increased outlook for the year to 74 percent. We were previously at 73 and we had taken it up all year and so really just great work on our manufacturing team. We're gaining scale on some of our new products. The costs are coming down, the warranty expense, so all good durable improvements that we expect to continue. Anyway, I think that's allowed us to continue to, you know, make the OpEx investments that we needed to in order to, you know, continue to, you know, modernize our technology and also has been helpful in us launching some of the initiatives that Sheri talked about that allowed us to, you know, mitigate some of the turbulence that we've been seeing with the recent Medicare administrative changes.
Speaker Change: Thanks for tuning in. We'll see you next week.
Speaker Change: Got it. Appreciate that. And maybe a follow-up. How has the conversion of training done by the patient education consultants instead of the sales reps kind of impacted? I imagine there's a nice tailwind in terms of margin expansion. So that's kind of the first part of the question. And once you get to kind of north of 50%, what's holding you back from trying to just fully convert using the PECs to do the training?
Speaker Change: Yes, I think, yeah, you saw our sales and marketing expense, yeah, we did gain leverage there. And so... Yeah, so I think, yeah, you saw our sales and marketing expense, yeah, we did gain leverage there.
Speaker Change: It's not only due to the trainers that you referenced, but also we did continue to leverage kind of our back office. We continue to give the sales reps some additional tools. We talked about pulling forward some of the CRM.
Speaker Change: toolkit that we're putting in place more robustly next year.
Speaker Change: So those are all things that have helped from specifically our question around leveraging the trainers. We set out a goal for 50%. We thought that was a reasonable goal, just thinking about where the demos are taking place, geographic density, and also just the sales reps.
Speaker Change: partnership with the PECs in making that transition. So definitely, we continue to evaluate that goal each quarter, but really happy with the progress that we've made this year and the improvement it's made from a sales rep capacity perspective.
Speaker Change: The other thing that I would say about that is some of our clinicians prefer that the demos are done in their office and they have the relationship most deeply with the sales reps. So in that case that's the preference of the provider so we we also go with that as being kind of the primary if that's where the provider is comfortable and then very opportunistic in the other ones where it makes sense that the PECs are able to be in the home with that with the patients for those demos.
Speaker Change: Okay, got it. And then just one quick one, if I may. It sounds like there's no change in the success rate of the Medicare claims on the methadema side of the business, despite the more stringent documentation requirements, which is great. Does that mean that there could be a buildup or kind of a backlog out there as we kind of move through this issue going forward? Thank you.
Speaker Change: Thank you.
Speaker Change: You know what, we actually feel that we really got ourselves caught up. And so, while there was a bit of a backlog the way we redeployed tools and process in people, we feel generally caught up.
Speaker Change: to drop out and go to a different vendor or drop out of having the surgery, you know, altogether. So, we feel like we're in a good place for stemming that patient leakage, feel very caught up on the claims. And so, now it's just a matter of the referrals to keep coming in, you know, the Medicare referrals keep coming in. We know there's patients there. We know our providers.
Speaker Change: see us as a leader in this space, so none of those market pieces are problematic for us.
Speaker Change: and we have streamlined our internal process and, you know, we'll just continue to do this.
Speaker Change: do it in a way that's efficient and best for patients. The other thing just on the claims approval, there's been a history where we had had exposure and understanding audits and documentation that was missing. And so for a number of quarters, the process has been getting better for that first pass claims approval. So we're not looking for that to improve at all. In fact, it's very good right now.
Speaker Change: and they are going to continue and sustain to be very good. So not a backlog and not an issue with now suddenly having a bolus of claims that we think are going to get approved. You can see our balance sheet, our revenue recognition is super healthy. So it's just now about continuing to operationalize the tools, process, and people that we have and continue to serve patients in the best and most effective way we can.
Speaker Change: Thank you.
Speaker Change: Excellent, that makes sense and really appreciate all the detail here. I'll jump back in queue. Thank you Kyle. Yep, thanks.
Speaker Change: Thank you. We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.
Speaker Change: Music