Good afternoon, ladies and gentlemen, and welcome to the Third Quarter of 2019 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session.

Please note that this conference is being recorded and will be available on the company's website for replay shortly.Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K, as well as our most recent 10-Q filing filed today with the Securities and Exchange Commission.

Such factors may be updated 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 also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP.

We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in 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, Tactile Medical's Chief Executive Officer. Please go ahead, sir..

Venus and Lymphatic Disorders. This study was a retrospective cross-sectional analysis titled "Lymphedema associated comorbidities and treatment gap." The authors analyzed de-identified data from the Blue Health Intelligence Research database for 26,902 patients with lymphedema.

The purpose of the study was to determine, both, the proportion of lymphedema patients with various known lymphedema associated comorbidities, and the treatment rates of patients with each comorbidity.

The claims data illustrated that breast cancer was the most frequently diagnosed comorbidity associated with lymphedema, and identified Venus leg ulcers as the second-most diagnosed comorbidity.It also identified notable treatment gaps for lymphedema patients with specific comorbidities.

For example; only 82% of patients with Venus leg ulcers has comorbidity, received any form of treatment for their lymphedema compared to 94% of patients with breast cancer receiving treatment.

According to the researchers, this is the largest study to-date detailing the comorbidities associated with lymphedema, and the lymphedema treatment rates within each comorbidity.

With this in mind, the study provides important evidence to advance the medical communities understanding of the diagnosed prevalence of lymphedema comorbidities and the treatment that currently exist for each.

The difference in treatment provided to each patient population was statistically significant, and illustrates a treatment gap based on the disease ideology.As part of our efforts to raise awareness of lymphedema and its treatment among clinicians, we also hosted two important events during the quarter.

The first event which we refer to as our clinical advisory council meeting was held in Minneapolis and attended by 12 physicians who specialized in the treatment of either vascular conditions or head and neck cancer.

The purpose of this meeting was to formally introduce fact down medical to these physicians, explain to them how our company is positioning itself to clinicians in the market and obtain their feedback on various aspects on marketing and strategy. The event proved to be very successful.

Our team received important feedback on a variety of aspects, including our marketing messaging, new product development strategy, physician education efforts and clinical research efforts.

The response from physician attendees about this event was very positive with many coming away with increased awareness and understanding of lymphedema and specific ways to assist and raising awareness of the condition and its treatment.Additionally, we hosted our first all-day educational event focused on therapists that are interested in learning more about lymphedema and its treatment.

This event was held in Dumont, Iowa and was attended by 47 clinicians. They received seven continuing education units for their participation in the event.

Feedback on the event and its programming was very positive as well and we look forward to hosting similar education opportunities in the future.I'll conclude today's discussion on our operational highlights with a brief update on our Airwear static compression garment.

We expect to begin the limited market release of Airwear by the end of 2019 and have made progress in securing our products supply chain to prepare for the full commercial launch in the first quarter of 2020.

Successfully incorporating Airwear into our product portfolio will enable us to provide future patients with an innovative solution for conservative therapy and establish awareness of pack-down medical in our pneumatic compression systems early in their treatment pathway.Let me now turn the call over to Brent to discuss our third-quarter financial results in greater detail and review our 2019 guidance, which we updated in our press release this afternoon.

Brent?.

Thank, Jerry. Total revenue for the third quarter increased 37% to $49.6 million compared to $36.3 million for the quarter ended September 30, 2018. Our total revenue performance in the quarter was driven by sales and rentals of our Flexitouch systems, which increased $11.4 million or 34% year-over-year to $44.7 million.

The increase in Flexitouch revenue was largely driven by the expansion of our sales force, increasing physician and patient awareness of the treatment options for lymphedema, broad and network coverage with insurance payers and growth in the Medicare channel.

Sales and rentals of our Flexitouch systems accounted for 90% of our total revenue in the third quarter of 2019 compared to 92% in the prior-year period.Entre and Actitouch sales increased $1.9 million or 64% year-over-year to $4.9 million in the quarter.

The performance of our Entre, Actitouch product category benefited from the strategic shift in 2018 to managing these orders in house and expanded contractual coverage with insurance payers.

Third-quarter revenue by payer was 72% commercial, 16% BA and 12% Medicare, compared to 71%, 19% and 10% respectively last year.As we have previously mentioned, our total revenue growth during the third quarter benefited from the adoption of the new lease accounting standard, ASC 842, that became effective on January 1, 2019.

The adoption of ASC 842 did not require us to restate any of prior periods.

In the third quarter and the first 9 months of 2019, the adoption of ASC 842 benefited our total revenue growth by 3 percentage points and 5 percentage points respectively.Beginning in 2019, we also now classify revenue from garments sold to our rental customers as rental revenue. This garment revenue was previously classified as sales revenue.

For consistency and comparability purposes, garment revenue associated with rental agreements was reclassified to rental revenue in the prior-year periods.

As a reminder, to assisting comparing our 2019 revenue and growth profit reporting to prior periods, we provided an unaudited supplemental schedule as an appendix to our 8K filed on May 6.Turning to the rest of the PNO, third-quarter gross profit increased $9.2 million or 35% to $35.4 million compared to $26.2 million last year.

Gross margin was 71% of sales in the third quarter of 2019 compared to 72% of sales in the third quarter of 2018.

The decrease in gross margin was primarily attributable to revenue mix by product and payer compared to last year and to non-cash amortization expense related to the intangible assets licensed from Sun Scientific.Third-quarter operating expenses increased $7.4 million or 30% to $32.2 million compared to $24.8 million last year.

The increase in operating expenses in the third quarter was primarily driven by a year-over-year increase of $5.1 million or 33% in sales and marketing expenses due to continued investments in the field sales team, an increased spending on marketing initiatives.

The increase in operating expenses was also impacted by higher reimbursement, general administrative expenses, which increased $2 million or 25% to $10 million compared to $8 million last year.

This increase was primarily due to increased personnel-related compensation expense in our reimbursement operations, payer development and corporate functions as well as increased professional fees and legal expenses.Operating income for the third quarter of 2019 increased $1.8 million or 134% to $3.2 million compared to operating income of $1.4 million last year.

We recorded an income tax expense of $932 000 for the third quarter of 2019 compared to an income tax benefit of $248 000 last year.

The tax expense recognized in the third quarter of 2019 was primarily related to decrease tax benefits from share-based compensation compared to the prior-year period.Net income for the third quarter of 2019 increased to $2.4 million or $0.12 per diluted share compared to net income of $1.7 million or $0.09 per diluted share for third quarter of 2018.

Weighted average shares used to compute diluted net income per share were 19.6 million and 19.5 million for third quarters of 2019 and 2018 respectively. Third-quarter adjusted EBITDA was $6.4 million compared to adjusted EBITDA of $4.6 million in the third quarter of 2018.

Our adjusted EBITDA margin was 12.8% in the third quarter of 2019 compared to 12.6% in the third quarter of last year.As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

Let me now turn to review of our 2019 revenue guidance, which we updated in our earnings release this afternoon.We are raising the full-year guidance range to account for our stronger-than-expected performance in the third quarter.

For 2019, we now expect total revenue in the range of $186 million to $187 million, which represent growth of 29% to 30% year-over-year compared to revenue of $143.8 million in 2018. This revised outlook compares to our prior revenue guidance range of $182 million to $184 million, or 26.5% to 28% year-over-year growth.

As a reminder, our 2019 total revenue guidance continues to assume that the adoption of ASC 842 will benefit our full year revenue by approximately $6 million or 4 percentage points of growth year-over-year.

The line item components of our updated 2019 total revenue guidance which calls for growth of 29% to 30% year-over-year includes the following assumptions.Sales revenue will be in the range of $159 million to $160 million compared to sales revenue of $130.2 million in 2018.

As a reminder, the sales revenue guidance range includes the impact of the re-class of garments revenue to rental revenue. Rental revenue is expected to be approximately $27 million compared to rental revenue of $13.6 million in 2018.

The year-over-year increase in rental revenue for 2019 is expected to be driven by the impact of the adoption of ASC 842, representing 44% of the increase in rental revenue for 2019. Operational growth of approximately 35% over 2018 rental revenue, representing approximately one-third of the increase in rental revenue for 2019.

Our required guidance range assumed operational growth of approximately 20% to 22% in 2019.

The remainder of the increase relates to the reclassification of garment revenue to rental revenue that was previously reported in sales revenue.By product, our 2019 total revenue guidance range assumes sales of our Flexitouch products increased approximately 28% to 29% year-over-year in 2019 compared to 26% to 28% growth in our prior guidance range, and sales of our Entre/Actitouch products increased approximately 42% to 43% year-over-year in 2019 compared to approximately 30% growth in our prior guidance range.

In terms of the anticipated contribution of our new products, we continue to expect head and neck sales in the low to mid-single digits as a percentage of total revenue, and we continue to expect Airwear to be immaterial in 2019.Lastly, for full year 2019, we expect our gross margin to remain in the low-70% range, our adjusted EBITDA margin to be in the range of 13% to 14%.

This adjusted EBITDA range assumes stock-based compensation expense of approximately $10 million, approximately $1 million of expenses related to the move to our new corporate headquarters which we completed early in Q4.

As a reminder, the $1 million of expenses is comprised of approximately $400,000 of moving expenses, which will only impact our full year 2019 P&L. The remaining expense comes from accelerated depreciation on our current facility, and the higher rent expense related to occupancy at both, the previous and the new facility this year.

For the purpose of calculating earnings per share, we expect our fully diluted weighted average share count in 2019 to be 20 million shares.With that, I'll now turn the call back to Jerry for some closing remarks.

Jerry?.

Thank you, Brent.

In closing, we're proud of the impressive performance that our sales, reimbursement and operations teams were able to achieve during the third quarter, along with the profitability improvements that we were able to realize during the period.We're raising our guidance accordingly, and look forward to driving revenue growth rate and continued profitability improvements in order to bring 2019 to a strong close.

As we exit the year, we will continue to reinforce our leadership in the more than $4 billion U.S.

market opportunity for lymphedema and chronic Venus insufficiency by expanding and enhancing the productivity of our field sales organization, and continuing to capitalize on the strong market response to our Flexitouch Plus system, our high diagnosing account targeting strategy, and our broaden network coverage with commercial payers.We will also remain focused on implementing our longer term initiatives to facilitate the widespread adoption of our latest products and educate the medical community on the role of our technologies and treating lymphedema and other chronic swelling conditions.

More broadly, we're pleased by the increasing evidence that we've seen in recent years, and of the increased focus in the medical community on lymphedema.

One important anecdote that I've shared to highlight this trend is the fact that The American Venus Form, The Society of Vascular Medicine, and the American College of Phlebology, have all updated their charters to include either lymphedema or lymphatic care as an area of focus.

In fact, The American College of Phlebology has changed their name to The American Vein and Lymphatic Society.

I'm pleased to see that these societies are committed to raising awareness of lymphedema, and educating their members on its treatment.In conclusion, we remain excited about the opportunities and attractive tailwinds to our business, and we are committed to delivering strong, sustained and profitable growth for the remainder of 2019 and for the years to come.

I'd like to thank all of our employees for their impressive accomplishments during the third quarter, as well as our shareholders, and everyone on tonight's call for their interest in Tactile Medical.Operator, we will now open the call for questions..

[Operator Instructions] And our first question will come from Margaret Taxor [ph] from William Blair..

First one for me is, just walking through kind of the implied guidance and performance this quarter because the third quarter Flexitouch revenue really implies a very strong sequential change in unit-fold this quarter; that also implies sales approach to these up nicely as well.

So, I understand the year-over-year comps etcetera, but as you look at both, sequential indicators, it seems like there is a lot of traction fundamental within the business. Then you look at guidance for the full year and I appreciate the conservatism but you got to step change difference, maybe an uptake in slide in the fourth quarter.

So, walk us through kind of the way that you guys thought about guidance, what you saw in this period maybe that may or may not continue going forward? And then I've got a follow-up too..

Our updated guidance calls for 29% to 30% growth year-over-year. We're on-track after 9 months of 36% growth which is faster than or better than our full year growth expectations; that is consistent with what we've experienced each and every year.

So if you look back at the implied Q4 growth in both, 2017 and 2018, you'll see very similar expectations set and in fact, we're expecting even better growth of 15% to 18% in the fourth quarter.

We don't give quarterly guidance but our expectations really have not changed since we gave guidance in Q2, we've just seen a terrific Q3 performance and passed that growth on in this updated guidance for 2019..

Got it. I understood and part of the genesis of the question is historically I think the fourth quarter on a sequential basis for the last two years has been in the low-30s whereas I think right now it may be implied in the 29% range, and it's a little bit of a different but from this channel of this cadence and the thought process.

So, the other thing was - and this is kind of, maybe a little newer for us this quarter, as you hosted two events and so I wanted to call upon that.

The one event that you focused on therapists, have you been able to see anything in terms of those clinicians that attended, better identifying patients with lymphedema within their practice; how many change in prescription patterns? And then, as we think about the ROI of those investments why shouldn't we assume that should actually be a pretty nice move [ph] for growth as we go into next year and maybe cause more of these?.

Thanks, it's an excellent question. Certainly, the expectation in our providing this education [Technical Difficulty] to teach new customers what we can do, and then they take the opportunity to learn themselves on their own patients, how well we perform.

So, we do see this as a way to expand our business and are excited about doing more of these in the future..

Okay. And I'll sneak one more in just because it kind of gets into the same topic. But Flexitouch Plus, it seems like you're still seeing a lot of growth and enthusiasm from that.

Has that kind of been the same dynamic where it maybe took a few quarters to start on the bilateral patients, maybe from some of the clinicians that didn't have as much experience and so you're seeing kind of incremental traction or relatively steady? Congrats on the quarter..

Yes. Thanks, Margaret. I think Flexitouch Plus has proven to be a terrific contributor to our growth throughout 2019, and we expect that to continue going forward. The benefits and feature set of that product are such that we believe that we are in the driver seat in terms of our - versus our competitors with those features.

And we are seeing that play out in more and more clinicians, giving us business around their bilateral patients, maybe even who didn't give us business of those bilateral patients before. So, we've had good results from the launch of the Flexitouch Plus system and expect that to continue going forward..

[Operator Instructions]. Our next question is from line of [indiscernible]..

It's Adam on for JP. I was hoping to ask a question about next year. Recognizing you're not going to give guidance on today's call, but there appears to be a lot of levers for top line growth going forward that could impact 2020 with Flexitouch Plus, a full Airwear launch, maybe some international expansion among others.

Just hoping you could help us frame up at a high level some of the different puts and takes as we start to look ahead to next year. And then I have a follow-up..

Adam, it's Brent. I'd be happy to provide you a little bit of context on that. You're absolutely right. We're not providing guidance for 2020, but we do feel fortunate given the growth drivers that we're experiencing thus far throughout the year. Some of those growth drivers really are based on the sales headcount that we've got. So, no.

As Jerry mentioned in his prepared remarks, we have over 230 sales reps in the field. That certainly is a nice tailwind for us.

It's the Flexitouch Plus adoption that Jerry had just mentioned addressing Margaret's questions, but also the further penetration on the high diagnosing facilities that we've talked about and then just being the in-network provider for over 90% of the U.S. insured population. So certainly, we believe that those growth drivers will continue into 2020.

And so certainly, we're bullish on where that goes. And Adam, just to reiterate, I mean, you can think about us in terms of guidance as a 20%-plus top line grower. And then as you on down the P&L., 70% gross margins and then adjusted EBITDA continuing to grow through that leverage..

And then for my follow-up, just on sales force hiring. So, you mentioned you're now at more than 230 sales reps at the end of Q3. Was hoping to just get some more color on that. How much of that was adds versus lower turnover or churn? We continue to hire in Q4. And obviously, it's a competitive market for medtech reps.

So just level of confidence that you can continue to add call it, 30 to 40 reps next year in their onwards..

Yes. Good question, Adam. Thank you. We did end Q3 with over 230 in the field. I would say that's a combination of both improved hiring and reduced turnover. Keep in mind, that's increase of 45 people in the field since the end of the third quarter of 2018.

So, achieving this full year hiring goal despite the points you brought up about it being a challenging hiring environment is something we're particularly proud of.

We certainly would have loved to have had these guys or these folks on earlier in the year, but they're on now, and we're continuing to bring them up to speed and on-boarding them into the Tactile Medical way. So, we think it bodes well for our ability to continue to hire, which would be our strategy next year.

We will continue to expand our sales organization at about the same pace we did this year..

And our next question is line of Chris Pasquale from Guggenheim..

Jerry, it looks like this was a strong quarter for you guys in the commercial and Medicare channels, but I know the lower VA growth is going to get a little attention.

Can you just give us your latest thoughts on that segment of the business? And if you're seeing anything notable there that's driving that moderation in your growth rate?.

Absolutely, Chris. Thanks for the question, and welcome to the call. Year-to-date, the VA is up 19%. In the third quarter, it was up 13%. So, growth is definitely softer as a trend than the rest of the year. We see - but it's still growing is the point. We still see a couple items that are impacting growth in the third quarter.

We had a full quarter of the impact of us getting on the Federal Supply Schedule in September of last year. So, this quarter, the lower price showed up in - for the full quarter, whereas last year, it was a lesser impact. We have seen an impact in our VA business in Texas. And those two were kind of familiar with or had expected.

I'd say we also saw some softer demand in the wound clinics in the VA this quarter. We're watching this particular site of VA referrals.

It appears that it's more based on what the prescribers are allowed to prescribe, but again growth in the VA channel of double digits, something we're particularly happy with, and we're delighted with how fast the commercial business is growing, outpacing even our overall company growth for the quarter..

That's helpful. And then, Brent, I just wanted to follow-up on the question about 2020. I appreciate you guys aren't giving formal guidance today. But there is one unique dynamic you're going to be dealing with as you anniversary the accounting change.

So just to review the impact that you expect that to have year-over-year in 2020, just to make sure that everyone is on the same page there?.

Yes. No, certainly, we'll do that, Chris. I appreciate the question. So yes, just to level set, our rental revenue actually is comprised of 2 components. There is a piece that will continue and that's the 842 component that I referenced in my call.

But the question that, Chris, has brought up relates to rental agreements that were in place as of December 31, 2018. That revenue that trickles into 2019 will not repeat itself in 2020. So, if you think about it, that amount of revenue that will expire in 2019 is $5 million.

So just to illustrate what that might mean, Chris, is our guidance for rental revenue was $27 million for the full year of 2019. The impact of what you're talking about, the revenue that won't repeat itself in 2020 is $5 million. So, baseline, $22 million in 2019. And you can think about adding our 20%-plus growth rate on to that $22 million.

That just gives you a little bit of a framework for how you might think about it..

And our next question is from the line of Jason Mills from Canaccord Genuity..

Great. Jerry, I wanted to continue to push on 2020. So, I understand you're not going to be quantitative, but perhaps we could just talk about the puts and takes a little bit more. So year-to-date, we're in the mid-30 - run rate in the mid-30% range and the fourth quarter guidance is quite a bit different.

You went over a couple of the things that drive that, Jerry.

But as you think about 2020, the - how do you view yourself? Do you view the company is in position, while the guidance may not reflect it, in position to challenge the growth that you've done in, frankly, the last 2 to 3 years? Or do you feel like a lot of larger numbers you to some extent, the momentum in the business and you feel more like the fourth quarter guidance or something thereabout would be - or how you think about the business in 2020?.

Thanks for the question. First off, we don't guide quarterly. So, we have historically employed folks to think of us as a 20-plus percent top line grower. And that's what we're willing to give for 2020 guidance today. As I think about the puts and takes though, we've just closed a very strong quarter. Normalized growth in the quarter of 34%.

Impressive operating leverage. We've increased our guidance by the full amount we overachieved in the third quarter, and we're making really strong progress on operating metrics. We've got 230 in the field, that's what we wanted to have this year.

We're seeing good uptick of those folks, expanding the awareness of lymphedema and expanding our base of clinical evidence. We don't see any reason that we would run into any obstacles to continue to deliver on that 2,000 - or 20-plus percent revenue growth. Our expectations for Q4 have not changed since we gave guidance in Q2.

We're not backing down at all. We're simply passing on what's happened in the third quarter to our annual guidance..

That makes perfect sense. And that's - someone that tends to agree with that, I like you anticipate questions from those that tend not to agree with that. So, thank you for additional color. I think that helps quite a little bit. I guess, the second question is taking a step back to 20,000 feet.

When you went public, you were run rating in sort of developing a market, you're still - the franchise clearly developing the market for treatment of lymphedema, but when you went public, you're run rating under $100 million, now you're run rating over $200 million, a testament to the success of the franchise and the sales force you're building, the clinical evidence, et cetera.

I guess, the question is, as you're getting bigger and you're becoming more of - you're on the radar screens of these insurers, which you've been successful in penetrating, getting in network, what are you seeing and hearing with respect to that constituency as it relates to your therapy, not only on how much more they're spending on it but perhaps you could talk about how much they're talking about the cost savings associated with your therapy and the cost effectiveness therefore to continue to drive penetration of a market that I think is still under 15% penetrated, but perhaps you could comment on where you think you are now with respect to penetration of this market?.

Yes. No, that's a good set of questions, Jason. I guess I'd start by saying, as we look forward, the thing that excites us most about the opportunity is the fact that we know there were 1 million patients diagnosed last year with lymphedema, and we put about 40,000 systems on them in the last 12 months.

So, to your point, single-digit penetration of a very large market opportunity.In terms of the dealing directly with the payer audience, I'm certainly glad that we have a strong body of clinical evidence behind us that allows us to go have these conversations in a way that's based on science, not necessarily hyperbole.

So, we are able to get in front of payer medical directors on a regular basis and show them the evidence that you cited.

One, that the product works in their patient population, so we have strong efficacy data; two, that we have developed a base of economic evidence around the product that shows if this patient population uses our Flexitouch product, they stand to save money for the patient and for the payer.

And I think that's one of the reasons that even though we are coming up on the radar screen of payers that we are able to continue getting paid at a very high rate from these payers - very high approval percentage from these payers..

[Operator Instructions]. Our next question is from the line of Suraj Kalia from Oppenheimer..

So, most of my questions have been asked, Jerry, so I'll just stick with one. The 3% net contribution from ASC 842.

If I split it into the three segments, commercial, VA and Medicare, excluding the impact of ASC 842, can you give us what's the growth rate would have been year-over-year? And the reason I ask is, to a certain extent, I confess about myself. It gets a little modelled up because the denominator isn't accounted for, but the numerator is.

I'd love to get on an apples-to-apples basis, if I remove is the 3%., within these 3 buckets, how would growth look on a year-over-year basis?.

Suraj, it's Brent. I'll be happy to give you a little context on ASC 842. So, ASC 842 only impacts the commercial channel of our business. It has no impact in Medicare or the VA. So, what you would be looking at is commercial growth rate for third quarter of 2019 at 38%.

A portion of that 38% growth driver right there would be the ASC 842 impact on that number..

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation..

Thank you..