Susan Morrison - Chief Administrative Officer Kim Blickenstaff - President and Chief Executive Officer John Cajigas - Chief Financial Officer.

Rick Wise - Stifel Tao Levy - Wedbush Kyle Bauser - Piper Jaffray Ryan Blicker - Cowen Jeff Johnson - Robert Baird Greg Chodaczek - CRT Capital Kristen Stewart - Deutsche Bank.

Good day, ladies and gentlemen and welcome to Tandem’s Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Susan Morrison, Chief Administrative Officer. Please go ahead..

Thanks. Good afternoon, everyone and thank you for joining Tandem’s fourth quarter and full year 2015 earnings conference call. Today’s discussion may include forward-looking statements.

These statements reflect management’s expectations about future events, product development timelines and financial performance and operating plans and speak only as of today’s date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements.

A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings.

We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or other factors. Kim Blickenstaff, Tandem’s President and CEO will be leading today’s call. And at this time, I will turn it over to Kim..

Thank you, Susan. Good afternoon, everyone. Joining me on today’s call is our CFO, John Cajigas. We entered 2015 with bigger aspirations for growth, product development and operational progress and I am proud that we delivered on all those fronts.

It was our third full year of commercial sales and those three years we have grown from offering the t:slim pump, our flagship product to offering a full family of products that meet different needs of people with diabetes.

We have also demonstrated greater than 40% annual sales growth each year and quickly progressed to 36% gross margins, all while narrowing our operating loss for maintaining a number one rating by customers in the independent surveys.

These achievements are a direct result of the hard work, passion and dedication of our employees and I am thrilled with all that we have accomplished in a relatively short period of time.

In 2015, we achieved $73 million in sales, meaningful reduction in our cash earnings quarter, the clearance in successful launch of the t:flex pump and approval of our first PMA followed by the launch of the t:slim G4 within a matter of weeks.

And looking to the year ahead, 2016 is once again positioned for outpaced growth and continued improvement with our gross margin and operating margin as we manage the business towards profitability.

We also have a number of exciting product development initiatives for our customers and the diabetes community and continue to strive to provide people with diabetes the utmost care and support.

We are the first and only company to offer three different insulin pumps that address different needs of the diabetes community and we now have more than 33,000 customers. We continue to see that about 50% of our shipments have been to people who are new to pump therapy.

Capturing more than 15,000 pumps in 2015 and seeing a meaningful percent of our pump shipments coming from an under-penetrated portion of the market demonstrates that we are rapidly becoming a leading choice among people who choose insulin pump therapy.

It’s always been a goal of our company to expand the insulin pump market through new product offerings and in 2015 we continued to deliver on that commitment. We began sales of our second commercial product, the t:flex pump in May of 2015.

As a reminder, the t:flex is an exciting and unique product as it offers the large capacity insulin reservoir available for people with greater insulin needs.

We continue to believe it provides significant type 2 market growth opportunity, as only about 125,000 people using insulin pump of the potential 1.7 million people with type 2 diabetes who use daily rapid acting insulin. We shipped 1,500 t:flex pumps in 2015, nearly 60% of which were to people who reported previously using multiple daily injections.

We are also seeing an increasing number of our t:flex customers coming from people who have type 2 diabetes. Although, it’s early in our launch, we are encouraged with the initial response t:flex and it’s meeting an unmet need for many people with diabetes.

We have also had tremendous response to the most recent addition to our family of products, the t:slim G4, which we launched in September. Customers report liking the same easy-to-use pump benefits as t:slim with the integrated convenience of Dexcom’s G4 platinum sensor for continuous glucose monitoring.

In the fourth quarter, t:slim G4 made up more than 60% of our overall shipments. While there are some cannibalization of t:slim and this high percentage may also reflect some pent-up demand, it also demonstrates the great interest in this product.

Interestingly, in a survey of our t:slim G4 users, nearly 45% responded, so they were not using CGM before going on the t:slim G4 pump. This is very encouraging as it is expanding use of CGM technology, which further supports our mission to improve the lives of people with diabetes.

I am now going to turn the call over to John to provide some more color on our 2015 results. And after his remarks, I will spend some more time discussing our 2016 plans and initiatives..

Thank, Kim. Good afternoon, everyone. Overall, I am very happy we ended 2015 with a strong fourth quarter performance with our record sales for a single quarter, highest quarterly gross margins ever, and our entire organization continuing to manage our operating expenses and provide the highest range of customer service in the industry.

Our performance over the last 12 months and in the fourth quarter, in particular, continues to give us confidence as we manage the business towards profitability.

Looking at our sales and product shipment progress, first I will discuss our rolling 12-month metrics, which we continue to view as better indicators of our progress, followed by some particulars for Q4. As Kim mentioned, for the third in a row, we have delivered annual sales growth exceeding 40%.

Our sales for 2015 were $72.9 million, an increase of 47% from $49.7 million in 2014. This growth was driven by the increase in productivity of our sales force and contribution of our new product, the t:flex and the t:slim G4. Pumps shipped for the 12 months ended December 31 were 15,483, an increase of 43% from the previous 12 months.

As of the end of 2015, our cumulative shipments have grown to more than 33,000 pumps. Our average productivity per territory over the rolling 12 months ended December 31 was 21 pumps per month per territory compared to 17 for the previous 12 months.

In 2016, we expect our average annual territory productivity to increase to between 24 and 26 pumps per month per territory.

The higher productivity is expected to be driven by having a family of insulin pumps to offer customers in ACPs, new product enhancements that Kim will discuss and the opportunity to retain customers that purchase a t:slim in 2012 whose warranty will expire in 2016.

We anticipate that the largest increase in territory productivity will occur between the third and fourth quarters of 2016. As the current sales force continues to become more effective, new territories become productive and pump renewal opportunities began in Q4.

As a reminder, we are also in the process of expanding from 60 territories to 72 territories, which is expected to be completed in this quarter. We expect to see some sales force disruption from this expansion.

However, we believe it will be much more limited than what we experienced in 2013 and ‘14 when we did much larger expansions and completely reorganized all existing territories. Looking at some of the details of our Q4 sales and pump shipments. Overall, our Q4 sales were $29.1 million, up from $17.9 million in Q4 2014.

With respect to our limited t:slim G4 exchange program that we initiated in the third quarter, 700,000 pump sales and 230,000 of cost of sales were deferred from Q3 to Q4. The final numbers of pumps exchanged under this program was 150.

In addition to these deferrals recognized in Q4, we incurred a $200,000 charge for cost of sales of the t:slim G4 replacement pumps themselves and other associated costs with the exchange program.

Pump sales accounted for 86% of our total sales in Q4, which is in line with what we experienced in the fourth quarter of 2014, but higher than what we have seen in the last several quarters of 2015.

In Q4, the high level of interest in t:slim G4 contributed to the higher pump sales percentage and we anticipate the percentage of our total sales in pumps in 2016 will remain high. In Q4, we shipped a totaled 6,234 pumps, of which 571 were t:flex and 3,857 were t:slim G4.

This is well in excess of our previous all-time quarterly high of 3,929 pumps shipped in Q4 2014. The average productivity of our sales force in Q4 was 34 pumps per month per territory compared to 19 in Q3 2015 and 22 in Q4 2014.

Moving on to cost of sales and gross margins, our gross margins for the 12 months ended December 31 was 36%, up from 31% for the previous 12 months. Our gross profits during those periods increased to $26.6 million from $15.2 million.

Manufacturing volumes continue to play a significant role in our gross margin progress, with pumps shipped increasing 43% and our cartridge shipped increasing 83% during 2015 compared to 2014. We also saw improvements in our pump warranty replacement rates during the second half of 2015 as compared to the first half.

Additionally, as manufacturing cost of our new pumps and refurbished pumps have decreased, our actual cost per warranty estimates is declining. Our overall gross margin for Q4 was 46% compared to 35% in Q3 and 37% in Q4 2014. Our gross profit for Q4 was $13.5 million compared to $6.5 million in Q4 2014.

The primary improvements in Q4’s gross margins related to increased production volumes and manufacturing efficiencies from leveraging three pump products and cartridges that utilize much of the same core manufacturing and operational infrastructure.

As a reminder, the fiscal aspects are very similar among our pumps with the primary differences only being the software and the radio. The t:slim G4 uses the proprietary Dexcom radio, while the t:slim and the t:flex pumps include a Bluetooth radio.

The t:slim and the t:slim G4 utilize the same 300 unit capacity cartridge, while the t:flex cartridge has a 480 unit capacity.

Going forward, as our sales for t:flex and t:slim G4 provide incremental contributions beyond our t:slim sales, we also expect our manufacturing infrastructure and gross margins to benefit from the additional volumes these products provide.

The percentage of our total sales in Q4 represented by pumps, which have a higher gross margins than our pump supplies was 86% compared to 81% in Q3 and 86% in Q4 2014. Looking at the rest of our P&L, our operating loss for the 12 months ended December 31 decreased to $69 million from $75.7 million in 2014.

Our 2015 operating loss, included non-cash expenses for stock-based compensation of $13.1 million and depreciation and amortization of $4.8 million. For 2014, our stock-based compensation was $15 million and depreciation and amortization was $4.4 million.

Our annual operating margin improved significantly from negative 152% for 2014 to negative 95% for 2015. The 57 percentage point improvement was primarily due to sales growth, improvement in our gross margins and actively managing our operating cost. For 2015, our operating expenses only increased 5% year-over-year, while our revenues grew 47%.

Importantly, this leveraging of our operating expenses along with our gross profits increasing 74% has resulted in a year-over-year improvement in our operating margins that we expect to continue to see as we progress towards profitability.

Our operating loss for Q4 was $11.2 million delivering an operating margin of negative 39% compared to an operating loss of $17.5 million in an operating margin of negative 98% for Q4 2014. The significant improvement in our Q4 operating margin compared to Q4 2014 was driven by a 63% increase in our sales.

Our gross margin is improving almost 10 percentage points and our operating expenses controlled at 3% growth year-over-year. Our operating expenses for Q4 were $24.7 million compared to $24 million for Q4 2014. During Q4, we recognized non-cash stock-based compensation of $3.1 million compared to $3.9 million for Q4 2014.

Our depreciation and amortization for Q4 was $1.2 million compared to $1.3 million in Q4 2014. With respect to cash and cash flows, at the end of Q4, our cash and investment balance was approximately $73 million. Our cash and investments during Q4 decreased sequentially by $11 million. In Q3, our cash decreased by $16 million.

The decrease in our sequential quarterly cash burn was primarily driven by our increasing sales, gross margin improvements as well as our management of the growth of our operating expenses at a much lower rate in our sales growth.

Also in January 2016, we announced the amendment of our term loan facility with CRG, which will provide us access to $50 million in addition to the $30 million we borrowed from CRG in January 2013.

Under the terms of the amended agreement, we drew $15 million last month and we have a one-time option to access up to an additional $35 million before the end of the year. Moving on to our 2016 guidance, we expect our full year 2016 sales will be in the range of $105 million to $112 million for all products.

This represents an annual sales growth of 44% to 54% compared to 2015 and would be the fourth consecutive year of greater than 40% growth in sales. We do expect our 2016 pump sales will continue to be a much larger proportion of our total sales than our pump supplies.

Our 2016 sales will see a quarterly pattern impacted by typical seasonality, but with a slightly higher percentage of our 2016 sales achieved in the third and fourth quarters than the quarterly patterns of 2014 and ‘15.

This is primarily due to the combined effect of offering a family of three pumps, product enhancements to be made available throughout 2016 and the increasing productivity of our new territories in the second half of the year, as well as the contributions of early pump renewal opportunities that are likely to be realized beginning in the fourth quarter.

Also based on the significant contributions that the t:slim G4 has provided to our overall sales during the time since its launch in late September, we believe that the t:slim G4 will represent the largest percentage of our total pump shipments in 2016.

As a reminder, ASPs and gross margins for the t:slim, t:slim G4 and the t:flex are similar, because they are built using the same insurance codes and utilize the same core manufacturing other than the $100 for each t:slim G4 pump sold designated for joint marketing with Dexcom.

Moving on to our operating margin guidance, we expect our operating margin for 2016 to be in the range of negative 55% and negative 65%, which includes approximately $13 million to $14 million in non-cash stock-based compensation expense and approximately $5 million to $6 million in depreciation and amortization.

We do expect our gross margins on our product to continue to improve on an annual basis, driven primarily by the increased sales volumes as well as lower product manufacturing and warranty costs. Our long-term overall gross margin expectation is 60%, which we expect to achieve sometime over the next 2 to 4 years.

Our SG&A expenses are expected to increase in 2016 as our revenues and our installed base of customers grow.

In addition to increasing our sales force footprint, from 60 to 72 territories in Q1, we also expect other sales, marketing and administrative functions that are necessary to maintain our number one rate of customer support to grow over the course of the year.

Our core R&D expenses are expected to grow at a rate similar to last year as we have focused our efforts on the artificial pancreas project as well as continuous improvements to both our pump and cartridge hardware. Incremental to that growth in our core R&D expenses, we expect to spend approximately $1 million for clinical trial costs in 2016.

With respect to our cash, we expect our current cash, investments available cash under our debt arrangements and proceeds from the exercise of options and warrants will continue to be sufficient for operating needs for at least the next 12 months and under some scenarios could be sufficient for our needs until we achieve cash flow breakeven.

Key factors influencing our operating margin, cash flow expectations and ultimately our profitability timeline and potential capital needs, involve territory productivity, our ability to develop, secure regulatory approvals and successfully commercialize potential new products and our ability to gain leverage within our operations as our sales expands and our products gain market acceptance.

For 2016, cash utilized in Q1 is expected to be higher than in Q4 2015 primarily due to our expectation of lower sequential sales due to seasonality. Additional SG&A cost associated with the expansion of our sales force as well as the timing of the payout of 2015 sales commissions and annual bonuses that we expensed in 2015.

Our cash burn for the remaining quarters for 2016 will be dependent on such factors as the level and timing of quarterly sales and gross margins, expenditures associated with activities including product launch activities and tradeshows, R&D and clinical trial progress, manufacturing and facility requirements and general headcount growth as our operations expands.

And with that, I will turn it back over to Kim..

enhancements to our current products and new products. Starting with product enhancements, I am happy to share that we filed a 510(k) for extending our pediatric indication for the t:slim pump to ages 6 and above. As a reminder, the t:slim is currently indicated for individuals ages 12 and older.

We believe that with an expanded claim, the t:slim is moderate to look and easy to use interface will be able to market the benefits of pump therapy to the caregivers for this younger audience.

While approval is always at the discretion of the FDA, we are planning for clearance of a lower age indication in the second quarter, after which time we plan to submit a PMA supplement to expand our pediatric indication for the t:slim G4.

The next enhancement we are making in 2016 is the t:connect, our cloud-based data management application that is compatible with all of our insulin pump products. We have been working on an enhanced version of t:connect, called t:connect HCP that simplifies the ability of patients to share their data with their healthcare providers.

The t:connect HCP also allows the healthcare provider to establish a separate account that makes t:connect data from all their enrolled patients, more acceptable to the HCP’s offers. t:connect regularly receives the number one rating in independent customer surveys.

And as a company focused on meeting customer needs, this is something that we are very proud of. Our focus for the past year has been to extend that user experience to the HCP to provide our customers the valuable care and support.

We are excited to announce that we were beginning a beta launch of t:connect HCP to a small group of accounts in the coming weeks with an expanded launch to begin mid-2016. Our next development project is the tool for delivering product enhancements to our customers throughout the typical 4-year life of their pump.

The Tandem device updater, which we previously referred to as Project Odyssey was designed to do exactly what its name implies to give users the ability to update their pump software at home similar to a smartphone.

The first software enhancement we plan to offer through the updater is for our early t:slim customers to provide them with access to our t:slim software that’s being shipped on new pumps today.

As a reminder, this new software that we launched last year incorporates the number of changes based upon customer and healthcare provider feedback to our original t:slim.

An example of a new feature included in the updated software is the streamlined cartridge change process that provides users the ability to fill their cartridge with insulin off the pump rather than on the pump and expedites the fill tubing process.

Our ability to offer existing customers feature enhancements such as this, without any hardware changes, really highlights the true potential of touch screen technology in our customer-centric philosophy.

We anticipate receiving 510(k) clearance for our device updater in the second quarter and will do a beta rollout shortly following clearance followed by a full launch. Turning to our new pump products, we continue to make meaningful progress on the clinical applications of our pump.

Our first generation AP product will be a CGM integrated t:slim pump that will automate insulin delivery based on a predictive hypoglycemic algorithm that was developed internally in consultation with the industry thought leaders. We submitted a pre-IDE for this pump and had several discussions with the FDA last year to refine our clinical trials.

We plan to conduct an in-clinic feasibility trial beginning in the second quarter of this year and commenced the pivotal trial by year end. We believe this product will require a full PMA submission and our goal is to commercially launch this first generation AP product by the end of 2017.

Included in this timeline is an IDE submission prior to the commencement of each trial. Our second generation AP pump will feature an algorithm to automatically increase or decrease insulin delivery in response to predicted glucose levels. We plan to conduct feasibility studies this year and a pivotal study in 2017.

Overall, it’s a very exciting step to the company as we are starting to make meaningful progress in our automated insulin delivery initiatives that have been active beyond the scenes.

In addition to advancing the clinical applications of our technology, we also remain focused on the consumer applications that are at the foundation of our product development efforts.

To that end, I am excited to share that we are moving forward with the development of t:sport, which is a wearable pump for people who seek even greater discretion and flexibility. During 2015, we completed market research on t:sport and developed several hardware prototypes.

These prototypes include a pump that’s approximately half of the size of the t:slim and uses a short infusion set. The pump will be controlled through a separate device or a mobile application.

The touch-screen design of our current products provide us with an advantage in t:sports development as our experience in touch screen user interfaces places us in a unique position to quickly implement a safe and easily usable interface on a smartphone or other controller.

This year we will be actively developing the t:sport with a goal to submit the regulatory filing next year. As you can see, 2016 will be another busy year for us at the heart of our company is a passion to improve the lives of the people with diabetes.

Our family of product offerings, product enhancements and development efforts are in support of this mission as our sales and customer service initiatives. In the process, we are committed to building a sustainable business with improving margins and moving towards profitability. In combination, these are Tandem’s top priorities for 2016.

And over the upcoming quarters, I look forward to sharing our future achievements. With that, I will turn it over to the operator for questions..

Thank you. [Operator Instructions] And our first question comes from Rick Wise of Stifel. Your line is now open..

Hi, good afternoon everybody and truly congratulations on the excellent quarter. Kim, John, maybe I will start of just with if I guess more – thoughts in reflections on your 2016 sales guidance of 44% to 54%, you very recently – just, whatever 6 to 8 weeks ago, said that you thought that you could grow 40% plus in 2016.

I am just curious what’s giving you the confidence although obviously 44% and 54% is 40% plus.

What’s changed if anything that makes you more confident in putting a stake in the ground with such excellent growth outlook?.

Well, probably one of the things is the fact that we have expanded our sales force, Rick. And that productivity really is going to come online probably in the second half of the year as these people get more seasoned in their territories. Also it’s going to be the having in the first full year of having three different products in the marketplace.

So with the fast start that we got off to in the fourth quarter with the CGM and handheld enabled products, I mean, I really have high hopes for that for the year. So, it’s probably those elements together that really give us confidence about that guidance..

And I will just echo that. It has been very helpful in the fourth quarter that we had three pumps into the market to offer HCPs. And the diabetes community basically they have their choice of what pump they want to use..

Yes. And John, you talked about in the past mid 20s type territory productivity as a goal, you already – it seems like you are sort of there, maybe help us think through how do we think where it can go and when it can go there as we look at our – go ahead…..

Well, I think we are looking for 2016 to sort of average between 24 and 26. And as a point that is an average. So, we are going to have people that are a board spectrum of performance above and below that average.

And so our goal is to try to make sure that we have a tighter range and a higher range and potentially take that average up to something north of that number, but I really want to see where the year goes.

I think as I mentioned its family of three products is something we expect to have a high impact on productivity for the sales force and that’s why we expanded the sales force here in the first quarter..

Alright. And just last from me, a couple of questions on gross margin.

The COGS charge this quarter and the deferred cost, how do we think about those charges in the fourth quarter? Should we be looking at the fourth quarter gross margin normalize excluding those costs? And maybe just – again help us think about if you exited with a 46% gross margin in 2015 that’s something like a 600 basis point expansion.

Should we be thinking about similar expansion or no greater even in 2016 given the volume and the mix and everything else?.

Well, a couple of things for the fourth quarter on that exchange program, our margin overall was 46% on a GAAP basis. That included deferred revenue of $700,000 and deferred cost of sales of $230,000, but we also incurred a $2,000 charge for the actual G4 pumps that we sent out as well as the shipping cost going back and forth.

So, at the end of the day, if you do the math on that, you can see that the impact to Q4’s gross margins, we actually could have had a slightly higher margin without the exchange program, but roughly the same. The reason why it’s so high is primarily because of the volume and primarily because we had high pump sales during the quarter.

And that’s the expectation we have always had is that we can put three pumps into the market addressing unique un-penetrated markets to be able to get pumps into those markets in that segment, that will allow us to maintain a high level of our concentration of our sales in pumps, which have the higher gross margin.

And that’s the expectation we have for 2016. And I do expect gross margins to progress to a level that we see moving towards profitability towards that 50% that we see in 2 to 4 years..

Right. Thanks, again and congrats on the outstanding quarter..

Thanks, Rick..

Thank you. And our next question comes from Tao Levy of Wedbush. Your line is now open..

Hi, good afternoon..

How are you, Tao?.

Good. So, couple of quick technology questions if I might.

So, with the device updater will that allow a t:slim to have its Bluetooth turned on?.

That’s correct..

Yes. The first iteration won’t actually allow for that, but the long-term potential is work to be able to turn on. And so the first generation or the first software that we are going to be able to give our customers access to is actually the more recent software update that we launched mid last year, which gives basically enhanced features.

So, we want to be able to offer our early customers the same benefits that we are able to offer our t:slim customers today..

Got it. Okay, prefect.

And also on the updater, will that be – will that also potentially turn t:slim G4 into artificial pancreas type device once you get the algorithm approved?.

Yes, that’s our hope. I mean, that would be the purpose of it would be to push through these enhancements that are really software-based. So, that’s very much potential. I would have a regulatory path of its own, but it definitely would be our potential..

Great.

And then just lastly on the financial side, any difference in the quarter, direct versus distributor sales that might have helped your gross margin?.

No, it was fairly consistent – it’s right around 77%..

Okay, perfect. Great. Thanks..

Thank you. And our next question comes from Thomas Gunderson of Piper Jaffray. Your line is now open..

Hi, good afternoon. This is actually Kyle on for Tom.

I hope that you mentioned in your filings of the 510(k) the reduced indication from age 12 and above to 6 and above, can you talk a bit about what you think the expanded opportunity will be from capturing the younger patient cohort and sort of how many addressable type 1 diabetics are in that 6 to 11 age range?.

I don’t think we have any good data on what the potential increase in total market is, but I can tell you it’s really hampered our activities on the marketing basis, the sales basis to pediatrics, because there is no clear cut lines in these conference that we attend or in practices that we call on.

So, we really have to be careful not to market over the limits of our indication. So, it will sort of take the gloves off on those activities. And I think we can be more aggressive and see sales into that segment, but we don’t have our quantified number of how many are at that 6 to 12 age group..

Okay. And you said you expect to have all 72 reps on board by the end of this quarter.

How many you have now and what’s your longer term goal as you get closer to commercializing your next-gen AP pumps?.

Are you talking about our sales force side?.

Yes..

So we have expanded the 72 in this quarter counting on and start being productive in the second quarter and we haven’t really given guidance as to how large our sales force is going to be ultimately as we expand our product offerings, but as we take market share I would guess we probably have a sales force of 100 or so and we haven’t really determined in what steps we are going to be stepping up to that level, but that’s the sort of size I would receive based upon market share gains and product introductions..

Okay, great.

And then just lastly, how was pricing in the quarter?.

It’s fairly steady, consistent, nothing dramatic..

Okay, great. Thank you..

Thank you. And our next question comes from Ben Andrew of William Blair. Your line is now open..

Hi, good afternoon. This is Alexa in for Ben. Thanks for taking my question.

Can you hear me okay?.

Yes, you didn’t sound like Ben..

So, going back to that distributor question, so you said it was consistent like last quarter around 77% distributor, how do you think this is going to trend going forward?.

I think it’s going to be fairly steady. I think my comments haven’t changed. I think the landscape hasn’t changed for us dramatically. So, we are continuing to try to work on that, but with where we are, with the contracts we have in place, with where the peers are with consolidation, I think it’s probably pretty steady for the foreseeable future..

Okay, great. That’s helpful. Thank you.

And then in terms of your long term gross margin goals of 60%, does this goal assume no change in distributor I am assuming?.

Very modest..

Modest, okay.

And then the second question for me, I guess, would be on t:flex, for now that you are a couple quarters in, could you just kind of flesh out a little bit more detail on what your – what kind of interest you are seeing from clinicians and pushing traditional non-pumping T2s on to the pump and kind of what would it take to see adoption really accelerate in the T2 market?.

Well, I think we saw an overwhelming uptick in the CGM products in the fourth quarter which sort of overwhelmed t:flex, which was available in the third quarter and had probably more attention to it.

So, my assessment of it, it really does has an opportunity to expand that type 2 segment we are seeing that people have added to, ACPs have added to is a pretty more type 2s on the pumps.

We think that we score very highly in the ease of use, ease of training categories of being able to offer that only reservoir that really meets the needs of that patient population. So, we expect to have good growth over the coming several years as trends move on getting more type 2s on the pumps..

Okay, that’s helpful. I think that’s it for me. Thanks, guys..

Alright, thank you..

Thank you..

Thank you. And our next question comes from Doug Schenkel of Cowen. Your line is now open..

Hi, this is Ryan Blicker in for Doug. Thanks for taking my questions.

Following up on the gross margin, the long-term gross margin target, can you give us a sense of what is assumed from a revenue growth perspective to reach that 50% target over the next 2 to 4 years? I guess at the midpoint, do you needed to stay in this robust 40% growth to get there? Any color would be helpful..

Sure. I am not able to sort of give you the revenue level that we would need to obtain in order to get that margin, but I will tell you that our goal is to make sure that we grow on the long-term at least 40% per year, which is what we are trending towards, including 2016 in our history.

And I want to make sure that we maintain a high level of sales of pumps in our distribution of our sales among our products. So that is primarily what’s going to drive that to that level as well as just the efficiencies we gain with having volumes as well as the efficiencies in the process..

Okay, thank you. That’s helpful.

And two pipeline questions, first on the second generation AP products, I guess if all goes to plan with the first generation type of products, should we expect the second generation product potentially on the market by the end of 2018?.

I don’t think we have announced a formal timeline on it, but it’s going to be a PMA product obviously and start work after we are done with that first product. So that guess is as good as mine..

Okay. And lastly, on t:sport, it’s been a while since we have heard you talk about this one.

Can you give us a sense of, I guess, what portion of the market you are missing out on here? Is this to more I guess directly compete with patch pump competitors there any other information?.

Yes. I would say that there is a desire on the part of people wearing patches that have a detachable catheter. And so what we are sort of doing is becoming a hybrid patch pump and it’s discrete. It’s a much smaller. It’s only about half the size of the t:slim.

So I think it’s going to appeal with that market segment and probably into the pediatric segment as well. So it’s showing pretty good marks, actually good marks in terms of market research. So we feel like it’s a viable product to pursue development on in this year..

Okay. Thanks guys..

Thank you. And our next question comes from Jeff Johnson of Robert Baird. Your line is now open..

Thank you. Good afternoon guys. So a couple of modeling questions and maybe a couple of pipeline questions as well, but John just starting on the modeling questions. I mean, what are the end market growth assumptions in 2016 guidance from a top line perspective.

And then I guess Kim, a higher level question, but how do you view guidance, I think the feedback I have been getting from investors here just after the fourth quarter prereleases, no upside to the year and that was a little disappointing maybe added a little pressure to the stock.

And then you put a big ‘16 guide out there, I mean do you aspire to beat numbers, do you put numbers out there from a guidance perspective that you think you can beat, you put numbers out there that you think are very realistic view at your outlook for the year, I just haven’t covered you long enough, maybe it would be just helpful to hear kind of how you think conceptually about guidance?.

We think conceptually about – first of all, guiding in ranges because a spot numbers probably not a wise thing to do, but we are more aspirational probably in the guidance that we are giving out. We hope that our activities during the year give us numbers that we can raise guidance and certainly what we want to rather than lowering guidance.

Sorry, hear to that that earlier guidance was disappointing, but we thought to send the message that we were going to have another year of 40% growth. I would send the right message to the Street. But we are looking for a higher growth from that and again our aspirations and how we incent our sales force is higher than that guidance..

And John anything on the end market assumptions in the guidance?.

No. I think our assumption is that the market is growing mid to high single-digits, overall..

Yes. Fair enough. And then Kim, just on [Technical Difficulty] Okay, just two pipeline questions.

So Kim one, I think when you talk about first-gen verses second-gen AP in the past, the FDA it kind of given you feedback that you need to develop in the sequential nature, it sounds like you are pivotal on the second-gen could start in ‘17 before you have approval for the first-gen, has something changed there are they freeing up a little bit like move forward on second-gen before first-gen is completely wrapped up or anything I m missing there?.

No. I think it’s still in the same sequence that we have given guidance on before. Exactly, when we can start those feasibility and then the pivotal on the hyper portion of it is probably really going to be coming after the hypo portion is finished..

Okay, that’s helpful. And then my last one just on t:sport, half the size of the t:slim, what would you at this point, how are you thinking about the reservoir size on that, number one.

And number two, would you view this as an alternative to t:slim, would this be anything what you would expect or think that patients might buy this as a second pump to use in certain situations or would this be a primary pump with just a smaller reservoir smaller size?.

Yes. It will have a smaller reservoirs targeted to have a 200 unit reservoir. And so I think it is targeting the population that doesn’t have the need for 300 units or 480 units, and I think is a significant part of the market for that probably 20% of 25% given what animus has been able to with lower volume reservoir..

Got it. Very helpful. Thanks guys..

Thank you. And our next question comes from Greg Chodaczek of CRT Capital. Your line is now open..

Thank you.

Just two quick housekeeping questions for you John, how many t:slim G4s were there in the fourth quarter?.

How many did we sell?.

Yes..

We sold 3,857..

Fantastic and the $100 that goes to Dexcom, can you explain where that ends up on the P&L?.

It’s really in the liability. And then on the P&L itself, it’s on the liability on the balance sheet and on P&L, it’s on the cost of sales line..

Okay.

And technology wise is the Bluetooth radio on the current t:slim strong enough for a G5 Dexcom sensor?.

Yes. Absolutely..

Okay. I am just checking.

And in terms of the t:slim AP, what device would you go to the FDA with, would it be a G4 or would it be a t:slim with a G5?.

Well, right now, the plan is t:slim G5, but it’s possible that G6 may be pushed up in time to be included in that product development cycle. So Dexcom has some new news on their timing of the G6, so it may have an impact on our program..

Okay.

So it would be using the Bluetooth radio and a regular t:slim using their G5, their latest and greatest G5?.

That’s correct..

Okay, great. Fantastic. Thanks guys. And our next question comes from Kristen Stewart of Deutsche Bank. Your line is now open..

Hi. Thanks for taking my questions. Hi everybody.

And just wanted to see if I could get your thoughts on the competitive environments, given that you guys are growing so slowly at 40%, 50% and then markets have been growing like mid single-digits may be high?.

Okay. Sarcastic..

Yes.

You sense a sarcasm, can you may be just talk about the competitive environment that you were seeing, obviously kind of entering into 2015, there were some concerns like competitively speaking with J&J’s launch and Medtronic, with their new pumps and you guys have seemingly done while obviously exceeding 40% in 2015 and guiding to – you have guided in 2016 so you seem to navigating the environment, but maybe if you could just give us a refresh on what you have seen in 2015 and just kind of how you are thinking the landscape is going to be shaking out in 2016? And I should clarify that with sarcasm?.

With sarcasm. Yes. We charged on….

That probably doesn’t hear to my voice..

Okay. We probably saw the most change in ‘14 and ‘15 with the availability of the Medtronic low-glucose suspend product, the threshold version of that, it’s not a predictive version, let’s say – it’s a threshold point.

And that had a lot of noise around and seem to sort of confuse the markets they positioned it as the artificial pancreas and they have got lot of press and so forth. But it just simply didn’t do well in the market because there was CGM underperforms the Dexcom product.

And then, the vibe integration with CGM also was sort of the headwind for us that gave us to two competitors, we didn’t have that feature, we have to wait to the end of the year to sort of remove that headwind, but our growth from the CGM segment certainly show that we have a very competitive product with all the t:slim features and the CGM stacked on there.

So I mean I think if I look back on the year, the biggest landscape changing was us in terms of being able to come to market with CGM..

I guess, was thinking through the guidance for next year, I guess reflecting back to the beginning of 2015 you did have a little bit of that recall and I guess the increased awareness the higher number of territories and then the full completeness of the product.

I guess, then all that should speak to I guess, I higher rate of growth for next year and for the replacement cycle – that really just kicks in, in the fourth quarter and then really it’s more – really more of a 2017 growth driver, correct?.

Correct..

Okay.

And with that you are building that into your productivity numbers?.

Yes, I am. It’s a smaller proportion. So just as a reminder, 2012 we sold about 1,000 pumps. The majority of that was sold in the month of December.

So there is an assumption on our part of how many of those will actually renew in December, complete the selling process, complete the insurance verification process when we shipped out prior to December 31.

So that’s a tall order to get through so we have a more modest assumption on what we expect for those pumps in December that were sold in December 2012 to be renewed in December 2016..

Okay. And Medtronic has huge call center that typically handles a lot of their referrals.

Your approach is going to be doing that more through the rep at this point rather than centralize that?.

We will utilize our inside sales force and our IVS could do same thing. It’s just trying to move it through the process that is compacted by the timing of when the year end occurs and deductibles resetting whether they can get done in..

Okay. Alright. Congrats on a good quarter and nice guidance for the year. Thanks, everybody..

Thanks, Kristen..

Thanks..

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Blickenstaff for closing remarks..

Okay. Thanks everybody for joining us on this call today and listening to the Q&A. We will be presenting at the Cowen Annual Healthcare Conference, which is on March 9, that’s going to be in Boston. So, we can give you more of an update then and we have meetings in person.

In conclusion, I am pleased with the tremendous progress we made throughout the business in 2015 and look forward to continuing this momentum into 2016. So, we look forward to keeping you updated as the company continues its progress in 2016. So, thanks for joining us today..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone..