Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q4 2023 Earnings Call Transcript
Tandem Diabetes Care, Inc. (NASDAQ:TNDM) Q4 2023 Earnings Call Transcript February 21, 2024
Tandem Diabetes Care, Inc. misses on earnings expectations. Reported EPS is $-0.27 EPS, expectations were $-0.23. Tandem Diabetes Care, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to Tandem Diabetes Care’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to EVP and Chief Administrative Officer, Susan Morrison. Please go ahead.
Susan Morrison: Hello, everyone and thanks for joining Tandem’s 2023 fourth quarter and year end earnings call. As a reminder, today’s discussion will include forward-looking statements. These statements reflect management’s expectations about future events, product development time lines 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. Today’s discussion will also include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non-GAAP information presented should not be considered as a substitution independently or superior to results prepared in accordance with GAAP. Please refer to our earnings release, quarterly report on Form 10-K and the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.
Leading today’s call is John Sheridan, Tandem’s President and CEO, who will be joined by Leigh Vosseller, our Executive Vice President and Chief Financial Officer. I’ll now turn the call over to John.
John Sheridan: Thanks, Susan. We appreciate everyone joining us today. Looking back on 2023, we exited the year on a high note, demonstrating positive momentum across key areas of our business. In many ways, our efforts in 2023 focused on building and preparing for the future as we executed on multiple strategic initiatives. Most notably is the unprecedented accomplishment of being in various stages of launching 4 new products in the United States. These include two CGM integrations, along with the introduction of Tandem Source, our next-generation data management platform, and the milestone of adding Tandem Mobi, our new pump platform to our portfolio. Other strategic initiatives we completed include the onboarding of our European distribution center and driving operational cost savings across all products and processes through lean activities and other manufacturing efficiencies.
We’ve also been evolving our organization as we’ve expanded our leadership by attracting key talent with global experience to complement the team and help us prepare for the future. Lastly, we made meaningful advancement in progressing our channel strategy in the development and in the development activities of our longer-term portfolio. The team has been executing particularly well on our strategy to provide people with insulin-dependent diabetes and their care teams flexibility and choice in insulin delivery. These achievements were made possible thanks to the hard work and perseverance of our employees. Thank you, everyone, for your continued dedication and efforts to contribute to building our business and executing our vision to improve the lives of people with diabetes.
Evidence of this vision was highlighted in recent months, as we are now the only pump company to offer users choice in CGM integration in the U.S., having launched the t:slim X2 with both DexCom’s G7 and Abbott FreeStyle Libre 2 Plus sensors. The diabetes community has been enthusiastic in their response to having choice in their therapy management. Thank you again to our CGM partners for your collaboration. We are proud to be a leader in sensor integration and being the first insulin pump company to offer compatibility with your incredible newest technologies. In addition to CGM integration, just last week, we achieved the defining milestone of launching Tandem Mobi. We are now offering people choice in insulin pump platforms so they can decide how they want to wear and operate this device while getting the benefits of our #1 rated Control-IQ technology.
The response from internal and external people who participated in the early access program, as well as our health care providers, has been emotional and inspiring. Participants say that Mobi exceeded our expectations, sharing sentiments that it is freeing and liberating. An external former MDI user put it very well, saying that Mobi gave my brain time to process real world and not just how I manage my diabetes. It’s this kind of feedback that underscores our progress in furthering our mission to improve the lives of people with diabetes through relentless innovation and revolutionary customer experience. Operational and commercial readiness for the Tandem Mobi launch was the primary focus for us in the fourth quarter. We are well equipped to continue scaling this exciting new technology, first with the DexCom G6 integration, which is now available, followed by DexCom G7 integration later in the second quarter and then integration with the FreeStyle Libre 3 technology.
Another highlight that continues to stand out in the fourth quarter is that Tandem customers are highly satisfied. We see this reflected in both independent and our own customer surveys and our continued high renewal rate. With Tandem technology, people are able to wake up happy by sleeping well through the night and thinking less about their diabetes. It’s from their experience with our company and our AID solutions which consistently demonstrate improved clinical outcomes. It was an honor to have the data from Control-IQ trials cited in recently updated American Diabetes Association standards of care to support their guidance that AID systems are preferred over non-automated pumps and multiple daily injection and should be offered for diabetes management to youth and adults with Type 1 diabetes.
We’re continuing our commitment to AID advancement, which we delivered on in the fourth quarter with our receipt of FDA clearance to lower the age indication for Control-IQ and expand its feature set with options for greater personalization. We’re proud to offer the number one rated automated insulin delivery system by patients and health care providers, and we’ll continue to innovate with new indications and features. As we’ve seen across the industry in the past 5 years, innovation drives technology adoption. That’s a competitive market, yet remains large and underpenetrated. Approximately half of our new customers have converted from multiple daily injections, and the remainder from competitive conversions. With the launch of our new products this year, we are focused on increasing pump adoption, bringing the benefits of our technology to more people living with diabetes.
As we expand the pump market, we expect to see new customers for multiple daily injections begin to outpace growth and competitive conversions. Turning to our performance outside the United States. 2023 was a year of transition for us. It included a number of unique onetime events that pressured our sales, such as the transition to our European distribution center to improve supply chain efficiency and then the more recent change in the French reimbursement structure. With these events now behind us, our focus is returning to a meaningful growth rate. We’ve welcomed new commercial and international leadership with global diabetes experience who are furthering our strategy to bring the benefits of our technology to more people worldwide. The geographies we serve are increasingly competitive, but we have a strong offering today with our number one rated t:slim X2 with Control-IQ and a significant opportunity as the markets we’re in internationally are typically less than 20% penetrated.
We are also focused on bringing our technology offerings outside the United States closer to parity with our U.S. portfolio. This began last month with our scaled international rollout of DexCom’s G7 integration only 1 month following it’s broad U.S. availability. Other innovations we plan to begin offering internationally this year and include the deployment of our Tandem Source data management application, the launch of our mobile application for the t:slim X2, which features the ability to deliver bolus from a phone along with valuable data insights, and the t:slim X2 integration with the Abbott FreeStyle Libre 3 sensor. We’re also taking steps to offer Mobi outside the United States, which includes regulatory work and localization.
In addition, we are working to advance our portfolio of future products, which center around our 3 pump platforms, t:slim, Mobi and Sigi, each of which are designed to appeal to different segments of people living with diabetes. For our t:slim and Mobi systems available today, we are working on exciting features such as the extended wear infusion set and a tubeless wear option for Mobi. For Sigi, we’re in active development of an ergonomic patch pump that features the use of pre-filled insulin cartridges. And like all our pumps, it’s rechargeable, as it’s part of our commitment to sustainability. We have a number of clinical studies underway, and plan for this year in support of these development initiatives. We will also be advancing our automated insulin delivery algorithm and expanding its indications to include people living with Type 2 diabetes.
As we look ahead, 2024 is positioned to be a year of tremendous opportunity for Tandem. The strengths that drove meaningful growth in the past are once again in place today. These include having a differentiated portfolio of technology solutions, our highly weighted customer service, our number one rated automated insulin delivery algorithm and our international opportunity. I’d now like to turn the call over to Leigh, so she can share more details on the fourth quarter results and our financial expectations for 2024. Leigh?
Leigh Vosseller: Thanks, John. As a reminder, unless otherwise noted, the financial metrics I’ll be discussing today are on a non-GAAP basis. Reconciliations from GAAP to non-GAAP results can be found in today’s earnings release as well as on the Investor Center portion of our website. We ended 2023 with more than 450,000 customers receiving the benefits of the t:slim X2 worldwide, which is 7% growth over the prior year. Our fourth quarter sales exceeded our baseline expectations at $209 million, bringing the full year to $773 million in worldwide sales. Starting with the U.S. market. This was the highest shipment quarter of the year at 21,000 pumps, including our highest ever quarter of renewal pumps. Standard seasonal trends were evident with 24% growth in pump shipments over the third quarter.
The ability to buy X2 and switch later to Mobi through Tandem Choice was an appealing opportunity for many. As expected, there were customers who decided to wait to purchase their pump once Mobi became available. Renewals continue to meet historically high capture rates, demonstrating strong customer satisfaction and retention. After our customers whose warranties expired in 2023 have already purchased a new t:slim X2 pump. We also continue to see high rates of people whose warranty expired in prior years purchase a new t:slim pump, and as a result, our total renewal shipments year-over-year grew by more than 50%. U.S. sales in the fourth quarter were $163 million, and sales reached $580 million for the full year. Sales in both periods were once again fueled by supplied and installed base growth, with about half of the sales for the year coming from supplies.
We are now serving more than 310,000 people in the U.S., an increase of 7% compared to the end of 2022. Dynamics were similar outside the U.S., with supply sales being a meaningful contributor in the year. Our in-warranty installed base has now reached approximately 140,000 people, growing 8% over 2022. Adoption of our technology outside the U.S. has been remarkable over the past 5 years, as our installed base has grown to levels that took us more than 8 years to achieve in the U.S. Supply sales to support this base grew 35% year-over-year in the fourth quarter. This was due in large part to variability in ordering patterns in the prior year before the distribution center was fully operational across all European markets. Fourth quarter sales outside the United States were $46 million on 6,000 pump shipments.
As anticipated, these results reflect 2 onetime events. The first was from a distributor in a larger market shifting their pump order into 2024 as they managed inventory levels in anticipation of t:slim’s integration with the G7 sensor, which began rolling out internationally in January. The second onetime impact was an $8 million sales reduction related to the implementation of a new rebate structure in France associated with our existing installed base. Excluding the impact of that rebate, sales in the fourth quarter has been more in line with recent quarterly levels. We do not anticipate the rebate will have a material effect on o-U.S. sales going forward. Full year 2023 sales outside the United States were $193 million, reflecting both the $8 million rebate reduction in the fourth quarter along with a $20 million headwind in the first half of the year due to our European distribution center transition.
These unique events were disruptive to our near-term results, but allowed us to lay the foundation for opportunities to grow this business more efficiently and meaningfully going forward. Turning to margin performance. Our 2023 gross margin was 51% compared to 52% in 2022. We saw improvement year-over-year in underlying key fundamentals, including higher average selling prices and lower manufacturing costs for pumps and cartridges. These benefits were offset by unfavorable product mix, with pumps representing just under half of our worldwide sales in 2023, as well as geography mix and the impact of the rebate pricing adjustment in France in the fourth quarter. The rebate adjustment was most impactful to our fourth quarter margin results. Gross margin was 51% in the fourth quarter, pressured 2 percentage points by the rebate, and our adjusted EBITDA margin was 2% of sales, which was pressured by 4 points.
Despite this adjustment, we maintained positive adjusted EBITDA for the third quarter in a row as we continue to focus on operating efficiencies across the business to fund investments to support our R&D projects and new product launches. For the full year of 2023, our adjusted EBITDA margin was slightly negative at 1% of sales. Turning to cash. We funded several key initiatives in 2023, including $69 million for acquisitions, $25 million for strategic investments and $27 million for capital expenditures primarily associated with increased manufacturing capacity for new products and build out of our headquarters as part of our facilities consolidation efforts. We remain thoughtful about how and when to address the $288 million in convertible notes which will become a current liability in the second quarter.
Our balance sheet remains strong with $468 million in total cash and investment. Looking ahead, we are excited for the opportunities that our new product launches offer in 2024 with a return to sales growth. Our non-GAAP sales guidance is approximately $850 million in 2024 or 10% sales growth, with the majority of sales coming from recurring revenue streams. This does not assume any inflection or acceleration in sales and does not reflect our bullish enthusiasm for new offerings. We will continue to gather and assess data related to new product adoption to inform updates to our guidance in upcoming quarters. U.S. non-GAAP sales are expected to be $625 million or growth of 8%. This contemplates a competitive environment consistent with 2023, with growth largely based on our more predictable supply and renewal sales with a growing renewal opportunity.
Looking back to pump shipments 4 years ago, the number of warranties expiring in 2024 alone grows by more than 30% to approximately 70,000. We have historically renewed approximately half of new renewal opportunities within the same calendar year. Both pumps and supply shipments are typically impacted by seasonal patterns across the quarters associated with insurance dynamics in the U.S. For example, first quarter pump shipments typically decline from the fourth quarter by approximately 30%. This step down may be more pronounced in the first quarter of 2024 due to the mid-quarter launch of Mobi and Mobi integration with G7 planned for the second quarter. The back half of the year typically benefits from seasonality, particularly in the fourth quarter, which for the past few years has represented nearly 30% of our U.S. sales for the year.
Our multichannel managed care strategy continues to advance in an exciting way, and we anticipate signing contracts in 2024 to begin serving Mobi customers through the pharmacy channel. U.S. sales guidance does not reflect any benefit from access to the pharmacy channel. We will update you on our progress on the expected longer-term benefit in future quarters. With that in mind, we are providing you additional direction on Q1 2024 for the first time, where we anticipate U.S. sales in the first quarter to be approximately $122 million. The remainder of the year is expected to follow historical seasonal patterns where both pump and supply sales scale up across the year. Sales outside the U.S. for 2024 are expected to grow 17% to $225 million, taking into consideration an increasingly competitive environment.
This also assumes a return to pump average selling prices of approximately $2,300, which is more similar to what we experienced in years prior to 2023 and contemplates the impact of the new French rebate structure. First quarter sales are expected to be approximately $53 million or an outsized growth rate of nearly 40% due to an easier comparison to the sales disruption in the first quarter of 2023 from the start of our European distribution center operations. Margins in 2024 are expected to be in line with 2023, with gross margin at approximately 51% of sales and adjusted EBITDA breaking even. While we expect to continue driving efficiencies across the business to fund the new product launches and future leverage, the launch of Mobi will initially create incremental pressure.
The first quarter, in particular, will see the greatest impact, where we expect gross margin of approximately 48% and adjusted EBITDA of negative 15%. As pump sales grow and Mobi volumes increase across the year, both margins are anticipated to improve, with adjusted EBITDA margins returning to positive in the second half of 2024 and free cash flows to follow accordingly. After volume scale, we anticipate Mobi will be the greatest contributor to our longer-term gross margin target of 65%. To summarize our 2024 outlook, worldwide non-GAAP sales are estimated to be approximately $850 million, including sales outside the United States of $225 million. Our gross margin expectation is approximately 51%, and adjusted EBITDA is estimated to be breakeven.
Our non-cash P&L charges for stock compensation, depreciation and amortization are expected to be approximately $120 million, of which $100 million is associated with stock comp and $20 million with depreciation. We are also providing first quarter guidance with worldwide sales of approximately $175 million, gross margin of 48% and adjusted EBITDA of negative 15%. I will now turn the call back to John.
John Sheridan: Thanks, Leigh. As you can see, it was a busy close to 2023 and an exciting start for 2024. Thanks to the unwavering commitment to our teams, we are now in the home stretch of completing the rollout of four new products, making significant progress on the next phase of our pipeline and maintaining the highest levels of customer service while generating operational efficiencies. The opportunity for Tandem Diabetes Care remains meaningful, and I look forward to providing you updates throughout the year as our company continues to progress. We will now open up the call for questions.
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