Tactile Systems Technology, Inc. 2026 Q2 Earnings Call

Please go ahead. Good afternoon, and thank you for joining today's call.

With me from Tactile's management team are Sheri Dodd, Chief Executive Officer, and Elaine Birkemeyer, Chief Financial Officer. Before we begin, I'd like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties. These could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report on Form 10-K, as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise.

This call will 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 investors relations portion of our website. With that, I'll now turn the call over to Sheri.

Thanks, Sam. Good afternoon, everyone, and welcome to our second quarter 2026 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. We delivered another strong quarter of execution in Q2, highlighted by continued strength in our lymphedema business and meaningful profitability expansion. Total revenue was $85.7 million, up 9% year-over-year, with lymphedema contributing $73.6 million, up 12% year-over-year. AffloVest contributed $12.1 million, a 7% decline year-over-year due to temporary inventory management dynamics among several of our large DME partners associated with the launch of our next generation AffloVest system during the quarter. Importantly, on a trailing 12-month basis, AffloVest revenue remains up 32% year-over-year, underscoring the durability of the underlying growth trend, even as we work through this near-term dynamic, which I will touch on shortly. Our strong revenue performance was complemented by another quarter of meaningful profitability expansion.

Gross margin improved 180 basis points year-over-year and adjusted 49% to $11.4 million, reflecting both operating leverage and disciplined execution across the business. We continue to be strategic and measured in our capital allocation, ending the second quarter with approximately $70 million in cash. Our cash balance sheet is strong, providing flexibility to invest in growth and return capital to shareholders over the short, medium, and long-term horizons. Based on our first half performance, we are updating our full year 2026 revenue guidance to a range of $360 million-$366 million. Within that outlook, we are projecting continued strength in revenue expectations for the lymphedema business while anticipating a more conservative view of the ordering patterns in our airway clearance business as some of our DME partners work through inventory as they convert to the next generation AffloVest system.

I will now review our second quarter performance by business line and provide updates on our ongoing strategic priorities. Elaine will then discuss our financial results in greater detail and provide additional perspectives on our outlook for the balance of 2026. Both the lymphedema market and our lymphedema business are healthy, and we are pleased to see the continued growth momentum reflected in a 12% year-over-year revenue growth in Q2. As we have shared in the past, our sales organization calls on a variety of payer types, including vascular and oncology practices, lymphatic therapists, and the VA, each of which tends to serve different patient needs. As a result, our revenue mix across payer types, Medicare, commercial, and VA, naturally reflects these points and is further influenced by the unique coverage policy dynamics.

Since aligning our documentation criteria with the now stable Medicare NCD policy, we continue to see increasing volume of Flexitouch orders, driven in part by our large number of Medicare patients accessing advanced pump therapy more directly than was allowed under the previous LCD policy. That growth was partially offset by the April 13th Medicare prior authorization requirement, which introduced additional administrative steps into the order process and contributed to some near-term moderation in Medicare order volumes during the quarter, even as Flexitouch adoption itself continues to grow. While the time from order completion to shipment is now slightly longer for these patients, prior authorization approval rates and adjudication timelines have tracked in line with our expectations. We moved quickly to prepare for these requirements ahead of the April 13th effective date and entered the quarter well-positioned to execute the new prior authorization process.

With a full quarter of experience now behind us, we expect the initial impacts of the implementation to moderate and operational efficiency to continue improving as our teams and the MACs gain familiarity with the new requirements. Our commercial revenue mix continues to demonstrate durable growth, fueled by patient demand, product therapy options, and sales execution across the provider and clinician channels. While the coverage policies are not uniform across commercial payers, we continue to see broad access to our therapies. Our efforts remain focused on reducing administrative burden and expanding patient access in areas where payer requirements or coverage limitations have not yet evolved to reflect the growing body of clinical evidence, society-based guidelines, and current standards of care. Regarding the VA, revenue performance here has less quarter-to-quarter variability due to the stable reimbursement environment and a more streamlined operating model.

We continue to view the VA as a strategic long-term opportunity given the breadth of providers and patient needs. To that end, we're really excited about our recently announced distribution agreement with ElastiMed to bring a novel compression therapy device specifically to veterans, active duty service members, and other beneficiaries served through the Department of Defense. We believe this opportunity will be an incremental growth contributor within the VA channel over time by expanding the range of treatment options available to patients and clinicians. I'll come back to this partnership in more detail shortly when we discuss our strategic initiatives. Turning now to airway clearance. As I mentioned, sales of AffloVest were down 7% year over year in the second quarter, reflecting temporary inventory management dynamics among several of our large DME partners associated with the launch of our next generation AffloVest system during the quarter.

As we work closely with the DMEs around the launch of our next generation AffloVest system, we learned of a few larger partners that had been carrying elevated AffloVest inventory levels. We expect this to moderate purchasing activity among these particular organizations as they work through existing inventory. As many of you know, this type of inventory management dynamic is common among DMEs. Based on our visibility today, we expect these inventory management dynamics to continue influencing ordering patterns throughout the third quarter, with purchasing activity beginning to normalize in the fourth quarter as their inventory levels rebalance. The underlying fundamentals of this business remain strong. The patient demand, coverage environment, and AffloVest competitive position are favorable. AffloVest is a differentiated product in a market leadership position, supported by strong DME partnerships and a large addressable market.

On a trailing 12-month basis, AffloVest revenue has grown at a compound annual rate of approximately 28% over the past two years and remains up 32% year over year in Q2, again on a TTM basis. This underscores the durability of the underlying growth trend, despite the near-term inventory management dynamics associated with the launch of our next generation AffloVest system during the quarter. Importantly, airway clearance remains a profitable contributor to our business. We are confident that the recently launched next generation AffloVest system will continue to solidify our category leadership position in high-frequency chest wall oscillation and remain the product of choice for DME partners, clinicians, and the patients they serve. Turning now to an update on LymphaTech. We believe this acquisition addresses two of the most important unmet needs in the lymphedema patient journey.

Earlier, more objective diagnosis and monitoring disease progression, and the ability to personalize therapy to a patient's specific clinical needs over time. Starting with diagnosis. Lymphedema is a chronic progressive disease that's largely diagnosed and monitored today through clinician evaluation, including girth measurement and patient-reported symptoms, inputs that are hard to standardize and unreliable for early detection. There are 20 million patients in the U.S. who have lymphedema but remain undiagnosed, and unlocking that population is a significant growth opportunity for us, and more importantly, for patient care. LymphaTech's FDA-cleared platform addresses the undiagnosed patient issue directly, providing objective, quantitative assessment of limb volume and circumference and generating a clinical-grade 3D model of the affected anatomy. This provides clinicians with a clear view of disease progression and gives patients a visual understanding of their own condition, which we believe strengthens engagement and supports more timely access to therapy.

Today, LymphaTech is deployed as a SaaS solution, primarily in oncology centers, where clinicians use it to establish patient baselines and monitor change over time. We see a larger opportunity ahead in expanding LymphaTech's role specifically as a diagnostic aid, helping close the gap for the millions of undiagnosed patients I just mentioned. As the market leader in this space, we would like to be the first to begin supporting these diagnostic needs of physicians and the complex patients they treat. To that end, we have submitted for an expanded indication as a diagnostic aid for lymphedema with an FDA expected approval in 2027. In parallel, we are advancing efforts to secure a CPT Category III code, which would establish a reimbursement pathway and support broader adoption over time.