Tactile Systems Technology, Inc. (TCMD) Q4 2022 Earnings Call Transcript

Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q4 2022 Earnings Conference Call February 21, 2023 8:00 AM ET

Company Participants

Daniel Reuvers - President and Chief Executive Officer

Brent Moen - Chief Financial Officer

Conference Call Participants

Adam Maeder - Piper Sandler

Margaret Kaczor - William Blair

Ryan Zimmerman - BTIG

Suraj Kalia - Oppenheimer

Operator

Welcome, ladies and gentlemen to nan Fourth Quarter and Fiscal Year 2022 Earnings Conference Call for Tactile Medical. At this time, each participants person been placed successful a listen-only mode. At nan extremity of nan company's prepared remarks, we will behaviour a question-and-answer session. Please statement that this convention telephone is being recorded and will beryllium disposable connected nan company’s website for replay shortly.

Before we begin, I would for illustration to punctual everyone that our remarks and responses to your questions coming whitethorn incorporate forward-looking statements that are based connected nan existent expectations of guidance and impact inherent risks and uncertainties which could origin existent results to disagree materially from those indicated, including those identified successful nan Risk Factors conception of our Annual Report connected Form 10-K to beryllium revenge pinch nan Securities and Exchange Commission. Such factors whitethorn beryllium updated from time-to-time successful our filings pinch nan SEC, which are disposable connected our website. We undertake nary responsibility to publically update aliases revise our forward-looking statements arsenic a consequence of caller information, early events aliases otherwise.

This telephone will besides see references to definite financial measures that are not calculated successful accordance pinch Generally Accepted Accounting Principles aliases GAAP. We mostly mention to these arsenic non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to nan astir comparable measures calculated and presented successful accordance pinch GAAP are disposable successful nan net property merchandise connected nan Investor Relations information of our website.

I would now like to move nan telephone complete to Mr. Dan Reuvers, Tactile Medical’s President and Chief Executive Officer. Please spell up sir.

Daniel Reuvers

Thank you, usability and invited everyone to our 4th fourth and afloat twelvemonth 2022 net call. I'm joined connected nan statement by our Chief Financial Officer Brent Moen. I'll commencement off today's remarks pinch a precocious level of reappraisal of our financial capacity successful nan 4th fourth and nan factors that drove our amended than expected performance. Then I'll stock an update connected immoderate of nan important operational highlights during nan 4th and successful caller months. Brent will reappraisal our financial results successful greater item on pinch financial guidance for 2023, which we introduced successful our net property merchandise today. And past I'll reason by sharing immoderate further thoughts connected our strategical priorities for 2023 and our outlook for this twelvemonth and nan years to travel earlier we statesman nan Q&A session.

With that, let's statesman pinch a reappraisal of our Q4 financial performance. In nan 4th quarter, we grew our full gross by 20%, year-over-year to $73.9 million. Our full gross capacity was good supra our expectations for nan quarter, enabling america to transcend nan precocious extremity of nan updated fiscal twelvemonth guidance scope that we shared successful our 3rd 4th net property release.

Looking astatine nan creation of our full gross maturation for nan quarter, we were particularly pleased to spot important contributions from income of some our lymphedema and airway clearance products. Revenue from our lymphedema products accrued 14% year-over-year to $65.8 cardinal and income of our airway clearance products accrued 90% year-over-year to $8.1 million.

We complimented our gross capacity successful nan 4th fourth pinch beardown year-over-year improvements successful our profitability pinch respective 100 ground points of GAAP and non-GAAP operating separator description , generating $5 cardinal and $6 cardinal of nett income connected a GAAP and non-GAAP ground respectively compared to nett losses successful their anterior twelvemonth periods and delivering a 100 ground points of adjusted EBITDA description year-over-year.

From a rate perspective, we generated $3.8 cardinal of free rate flow, which helped money our $5 cardinal milestone costs successful nan play related to nan AffloVest acquisition. In position of nan factors that contributed to our 4th fourth gross performance, pinch respect to our lymphedema merchandise line, we ended 2022 pinch 250 income representatives accordant pinch our headcount astatine nan opening of nan 4th quarter, which speaks to nan improved level of retention and engagement we've seen successful comparison to immoderate of nan challenging quarters we knowledgeable successful nan 2nd half of 2021.

Our 4th fourth lymphedema gross capacity reflects nan productivity of our income squad during nan quarters, arsenic nan bolus of reps that we hired and trained since precocious 2021 continued to lend much meaningfully. From a macro level, session throughput continued to stabilize and we saw pockets of VA centers resume seeing patients. At nan aforesaid clip our reps made notable advancement during nan 4th successful engaging pinch accounts, including those accounts that were antecedently unrepresented successful 2021.

Our ComfortEase little extremity garments and Kylee integer application, which were some launched successful July, continued to service our income squad good successful these efforts, providing them pinch caller solutions to talk erstwhile revisiting accounts. We saw beardown income of our lymphedema systems for usage connected nan little extremities passim nan quarter, reflecting nan occurrence of our squad and nan affirmative marketplace consequence to our ComfortEase garments.

Additionally, we were pleased to spot that CMS discontinued their argumentation that required suppliers to see certificates of aesculapian necessity for each pneumatic compression instrumentality claims opening January 1st, 2023. The upcoming alteration provided our reps pinch different logic to prosecute pinch and amended prescribers during nan 4th quarter.

Turning to our airway clearance merchandise line, our squad of respiratory specialists continued to activity pinch our existing guidelines of DME transmission partners, helping to amended and support their reps. We continued to acquisition coagulated request for our AffloVest airway clearance therapy from nan DME distributors. The DME distributors continued to grow nan readiness of AffloVest to further branches, and their reps person been successful successful identifying patients eligible for airway clearance therapy among their existing customers that they serve.

We judge that nan request we're seeing continues to bespeak nan expanding consciousness and take by antecedently underserved patients who would person different been near unidentified and untreated. For these patients, our AffloVest airway clearance therapy provides them pinch an at-home solution that's clinically proven to trim nan consequence of recurring pulmonary infections and pneumonias.

While we were pleased to spot astir double our airway clearance gross connected a year-over-year ground successful nan first afloat 4th pursuing nan day of our AffloVest acquisition, our income capacity continued to beryllium paced by nan proviso constraints that we've discussed connected our caller net calls.

With that said, our operations squad has made notable advancement successful moving to grow AffloVest accumulation capacity by establishing our 2nd supplier and securing our proviso chain. Our income capacity successful 2022 has america excited astir nan early prospects for this merchandise line, and arsenic we participate 2023, we're now squarely focused connected processing and supporting demand.

Shifting to a reappraisal of our operational advancement successful nan 4th quarter. From a caller merchandise standpoint, we proceed to beryllium pleased pinch nan consequence we've seen from prescribers, trainers, and patients pursuing nan afloat marketplace merchandise of our ComfortEase little extremity garments, and our Kylee Mobile Application. The feedback we've received connected ComfortEase garments from trainers and patients continues to underscore that nan product's creation features improving easiness of use, comfortableness and fresh person substantially enhanced nan diligent experience, particularly for nan ample information of our patients pinch bilateral lymphedema successful nan little extremities pinch constricted mobility.

Feedback from our patients highlights an appreciation for nan elastic and breathable materials utilized successful nan ComfortEase garments, which are designed to make nan garment much comfortable to deterioration and easier to use while continuing to present best-in-class treatment. These features are suggestive of nan improving diligent acquisition our merchandise improvement priorities will proceed to attraction on.

Our squad besides made dependable advancement successful expanding nan take of our first procreation Kylee Mobile Application, which is disposable connected some nan iOS and Android platforms by educating clinician prescribers and making nan app disposable to patients successful their doctor's offices done our in-clinic diligent merchandise demos en via societal media platforms. As a reminder, our Kylee Mobile App represents a caller assets for patients pinch devices to prosecute pinch them earlier successful their illness progression, amended them astir lymphedema and their curen options, and thief them combine nan requisite information to get a definitive test and suffice for treatment.

Once a diligent qualifies to person our Flexitouch aliases Entre systems, they tin usage nan app to way their bid and reappraisal our training to tutorials, helping to further heighten our manufacture starring customer support and training effort. During nan 4th quarter, our squad besides worked to grow nan app's capabilities beyond these first features. Most notably, we began incorporating Bluetooth functionality into our Flexitouch Plus systems shipped precocious past year.

Flexitouch Plus pinch Bluetooth allows patients pinch nan latest type of Kylee, which we precocious rolled retired successful February to synchronize their flexi touch pinch nan app, enabling them to automatically way and log their treatments. The latest type of our Kylee app besides allows users to easy summarize their caller curen activity successful an auto-generated activity report, which they tin stock pinch their doctor. While we're still successful nan first days of this rollout, we judge nan summation of Bluetooth connectivity betwixt Flexitouch Plus and Kylee represents a important milestone successful bringing much personalized attraction to nan curen of lymphedema.

In short, we're pleased pinch nan first occurrence of some ComfortEase little extremity garments and Kylee Mobile Application. As I'll talk later successful my remarks, they correspond nan opening of a much accordant cadence of merchandise invention from Tactile Medical successful 2023 and nan years to come.

Turning our efforts to raise consciousness for lymphedema and amended nan aesculapian organization connected its effective treatment. On November 16th, a caller objective publication was featured successful nan European Journal of Vascular and Endovascular Surgery discussing nan domiciled of obesity successful lymphedema. The publication was authored by 5 researchers, including our Chief Medical Officer, Dr. Tom O’Donnell, and described nan results of an observational cohort study that included de-identified diligent information from complete 60,000 lymphedema patients.

The researchers separated these patients into 2 groups, depending connected whether they were besides diagnosed pinch terrible obesity. The researchers past compared nan demographics, wellness related characteristics, curen plans, and outcomes of nan 2 respective groups. The study demonstrated that patients pinch some lymphedema and terrible obesity were much than 2 and a half times arsenic apt to suffer from cellulitis, a heavy and achy bacterial infection of nan tegument pinch perchance superior consequences. These patients had higher aesculapian costs arsenic a result.

Importantly, nan researchers besides recovered that these patients pinch lymphedema and terrible obesity received less targeted treatments for their lymphedema, including treatments that are proven to trim nan incidence of cellulitis. This underscores nan value of recognizing often overlooked lymphedema among those pinch obesity and nan value of early and meticulous diagnosis, arsenic good arsenic effective curen to trim some nan wellness and economical load for these patients. With this successful mind, during nan 4th quarter, our objective services and aesculapian acquisition squad continued their efforts to raise consciousness of lymphedema and its effective curen done acquisition events, including programming that featured nan results of this study.

In December, our squad launched nan first continuing acquisition portion people for obesity related lymphedema, which drew information from 266 attendees. During nan 4th fourth arsenic a whole, we hosted 43 acquisition programs that were attended by astir 1300 clinician participants. Our in-person and virtual programming for nan afloat twelvemonth trained astir 6,500 participants, demonstrating nan important domiciled we proceed to play successful expanding awareness.

Stepping back, we were pleased pinch our conclusion to 2022 from some a financial and operational standpoint and looking backmost complete nan twelvemonth arsenic a whole, we recovered from nan turnover successful our income unit that we knowledgeable successful precocious 2021, and our lymphedema merchandise statement returned to double digit gross maturation connected a year-over-year ground successful nan 4th quarter. We achieved exceptionally beardown maturation passim 2022 successful income of our airway clearance merchandise statement pursuing nan acquisition of nan AffloVest. On a standalone ground this merchandise statement achieved yearly maturation of 109% successful 2022.

As a consequence of nan capacity successful each of these merchandise lines, we were capable to raise our yearly full gross guidance successful nan 2nd and 3rd 4th net property releases, which we yet exceeded nan 4th quarter. And lastly, we successfully introduced nan first caller products Tactile Medical has released for lymphedema patients successful complete 3 years, reflecting our renewed multi-year committedness to caller merchandise innovation.

Now earlier I move nan telephone complete to Brent, I'd for illustration to talk an important announcement we made via property merchandise earlier this morning. Today we announced that Brent has communicated his volition to discontinue arsenic Chief financial Officer successful 2023. Since joining Tactile Medical successful September of 2018, Brent has been an important contributor to our maturation arsenic an organization, helping create a beardown financial and accounting team, amended our analytical and reporting processes, and execute aggregate milestones, including our largest acquisition arsenic a nationalist company.

And arsenic we announced successful today's property release, we've initiated a process to place a successor. In nan interim, we admit Brent's committedness to continued activity successful his domiciled done nan extremity of nan first 4th aliases until specified clip arsenic his successor is named. Brent has been a adjacent and trusted workfellow complete nan past 3 years since I joined tactile. On behalf of nan broader team, I'd for illustration to return nan opportunity connected today's telephone to convey him for nan important contributions he has made while astatine Tactile, and I look guardant to his continued support amid a soft transition.

Brent will now reappraisal our 4th fourth financial results successful much item on pinch our financial guidance for 2023. Brent?

Brent Moen

Thanks, Dan. It has been a privilege to service arsenic a personnel of Tactile's executive activity squad and activity pinch an fantabulous group of colleagues to create and turn nan statement arsenic we bring life-changing therapies to patients. Given nan spot and nan extent of our squad and nan financial and operational advancement made complete nan people of nan past year, I judge this is nan correct clip for maine to statesman my modulation to retiring from CFO domiciled astatine Tactile. I'd for illustration to convey everyone connected our squad for their support complete nan past 5 years, and I look guardant to supporting a soft transition.

Turning to reappraisal of our financial performance, full gross successful nan 4th fourth accrued 20% year-over-year to $73.9 cardinal compared to $61.7 cardinal successful nan 4th fourth of 2021. Looking astatine our full gross by merchandise line, income and rentals of our lymphedema products, which includes our Flexitouch Plus and Entre systems accrued $8.3 cardinal aliases 14% year-over-year to $65.8 cardinal and income of our airway clearance products, which includes our AffloVest merchandise statement accrued $3.9 cardinal aliases 90% year-over-year to $8.1 million.

Total gross by transmission was comprised of $41.4 cardinal from income to commercialized payers, $18 cardinal from Medicare, $8.1 cardinal from Durable Medical Equipment distributors, and $6.4 cardinal from nan VA. As a reminder, Durable Medical Equipment distributors is comprised of gross from our acquisition of nan airway clearance therapy business. These figures compared to our full gross by transmission successful nan 4th fourth of 2021, successful which Commercial, Medicare, DME distributors and nan VA represented astir $41.7 million, $10 million, $4.3 cardinal and $5.7 cardinal respectively.

Continuing down nan P&L, unless noted, each references to 4th fourth results are connected a GAAP and year-over-year basis. Gross separator was 70.5% of gross compared to 72.6%. Non-GAAP gross separator was 71.2% compared to 73.3%. The alteration successful non-GAAP gross separator was attributable to higher nonstop labour and freight expense, arsenic good arsenic spot buys connected prime components.

Non-GAAP gross separator excludes non-cash intangible amortization successful some periods. Non-GAAP gross separator besides excludes inventory write-offs successful nan 4th fourth of 2022 and non-cash acquisition value adjustments related to nan acquisition of AffloVest successful nan 4th fourth of 2021. As a reminder, we person provided reconciliations of definite GAAP to non-GAAP measures successful our net property release.

Fourth 4th operating expenses were $44.2 million, an summation of $3.2 cardinal aliases 8%. The summation successful operating expenses year-over-year was chiefly driven by a $2.3 cardinal summation successful income and trading expenses owed to caller hires added to our lymphedema income team, on pinch accrued recreation related expenses arsenic we returned to normalized business activities. The year-over-year summation successful operating expenses was besides driven by a $1.2 cardinal summation successful non-cash intangible plus amortization and non-cash earnout disbursal related to nan acquisition of nan airway clearance therapy business and a $365,000 summation successful investigation and improvement expenses offset partially by a $567,000 alteration successful reimbursement wide and administrative expenses.

Operating income successful nan 4th fourth was $7.9 cardinal compared to $3.8 cardinal successful nan anterior year. Non-GAAP operating income was $9.5 cardinal aliases 13% of income compared to $6.4 cardinal aliases 10% of sales. Other disbursal was $950,000 compared to $377,000 owed to a year-over-year summation successful liking disbursal driven by higher liking rates connected outstanding borrowings compared to nan anterior year.

Income taxation disbursal was $2.3 cardinal compared to $10.9 million. Income taxation disbursal successful nan 4th fourth of 2022 relates to valuation allowance being recorded against our existent twelvemonth deferred taxation assets, while income taxation disbursal successful nan anterior twelvemonth play was a consequence of establishing a afloat valuation allowance against our deferred taxation assets.

Net income was $4.6 cardinal aliases $0.23 per diluted stock compared to a nett nonaccomplishment of $7.5 cardinal aliases $0.38 per diluted share. Non-GAAP nett income was $5.9 cardinal compared to non-GAAP nett nonaccomplishment of $5.5 million. Adjusted EBITDA accrued 27% year-over-year to $12.1 cardinal aliases 16% of income compared to $9.5 cardinal aliases 15% of sales. As of December 31, 2022, we had $21.9 cardinal successful rate and $49 cardinal of outstanding borrowings. This compares to $28.2 cardinal successful rate and $55 cardinal of outstanding borrowings arsenic of December 31, 2021. In addition, during nan 4th fourth of 2022, we made nan $5 cardinal earnout costs to nan erstwhile proprietor of AffloVest.

Turning to reappraisal of our 2023 outlook, which we introduced successful our net property merchandise this morning, we expect afloat twelvemonth 2023 full gross successful nan scope of $269 cardinal to $273 million, representing maturation of 9% to 11% year-over-year. Our 2023 full gross guidance scope assumes income and rentals of our lymphedema products accrued astir 8% to 9% year-over-year, and income of our airway clearance products accrued astir 18% to 22% year-over-year.

For modeling purposes, for nan afloat twelvemonth 2023, we expect our GAAP gross margins to beryllium successful nan debased 70% range, our GAAP operating expenses to summation successful nan debased azygous digits year-over-year, liking disbursal of approximately$ 4.2 million, a taxation complaint of 25%, and a afloat diluted weighted mean stock count of astir $20 cardinal shares. We besides expect to make adjusted EBITDA of astir $23 cardinal to $25 cardinal successful 2023.

Our adjusted EBITDA anticipation assumes definite non-cash items including banal compensation disbursal of astir $12 million, intangible amortization and changes successful adjacent worth of contingent information of astir $5.8 cardinal and depreciation disbursal of astir $2.5 million.

Lastly, successful nan first 4th of 2023, we expect our full gross to summation successful nan scope of 10% to 15% year-over-year.

With that, I'll move nan telephone backmost to Dan for immoderate closing remarks. Dan?

Daniel Reuvers

Thanks, Brent. Our 2023 guidance reflects our belief successful nan expertise to return to double digit integrated gross maturation connected an yearly ground while driving year-over-year improvements successful our profitability profile. This position is based successful portion connected nan financial and operational advancement we made successful 2022. With an progressively established lymphedema section income team, traction emerging wrong our DME transmission partners and nan momentum created by our caller merchandise introductions, we judge we're good positioned arsenic we participate 2023 to thrust strong, sustainable, profitable maturation going forward.

In 2023, we're besides focused connected pursuing nan pursuing strategical priorities for nan twelvemonth to support our continued financial and operational progress, amended nan productivity of our lymphedema income team. Number two, grow and deepen relationships pinch DME providers and their reps for our airway clearance merchandise line. Three, create and present caller products and innovations focused connected addressing nan manner needs of our patients successful improving integer functionality and therapy optimization, and finally, enhancing our operational ratio to proceed to trim our wide costs to serve.

We judge that driving execution pinch respect to each of these 4 priorities will alteration america to execute our gross and profitability guidance for 2023 while progressing towards our longer word financial goals arsenic introduced successful our investor position past December. Specifically for nan afloat twelvemonth of 2025, we proceed to expect to present astatine slightest $350 cardinal successful full gross and astatine slightest $50 cardinal of adjusted EBITDA.

Additionally, we expect to make astatine slightest $75 cardinal successful cumulative free rate travel during nan three-year play from 2023 to 2025. As we advancement towards these goals, we judge important runway lies up for america successful nan extremity markets we serve, and we look guardant to extending our activity position arsenic we proceed to uncover and dainty patients pinch underserved chronic conditions.

I'd conscionable for illustration to adjacent by thanking nan full squad astatine Tactile Medical for their efforts this past twelvemonth and congratulating our squad connected a occupation good done successful 2022. A typical acknowledgment arsenic good to our customers, our proviso partners, our shareholders, and everyone connected this morning's call.

And pinch that operator, we'll now unfastened nan telephone for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first mobility comes from nan statement of Adam Maeder pinch Piper Sandler. Please proceed pinch your question.

Adam Maeder

Hi, bully morning, Dan and Brent. Congrats connected nan 4th and bully decorativeness to nan year, and Brent, congrats connected nan upcoming retirement. Maybe conscionable to start, I wanted to inquire for a small spot much colour connected nan 2023 outlook arsenic it relates to nan apical line, nan 9% to 11%. I deliberation I heard lymphedema maturation of 8% to 9%, airway clearance of 18% to 22%. Maybe conscionable talk a small spot astir benignant of what's assumed from a process situation standpoint, you know, AffloVest, are location proviso concatenation headwinds that are lingering successful into 2023? How do we deliberation astir those? Any gross publication from caller merchandise launches? And then, conscionable I conjecture is location immoderate wide conservatism baked into nan guideline arsenic we look to benignant of quadrate your outlook versus wherever you exited nan year? And past I'd had a followup, thanks.

Daniel Reuvers

Yes, acknowledgment for nan question, Adam. Yes, fto maine springiness you a small spot of colour connected really we arrived astatine 2023 guidance and past if Brent has thing he wants to add, I'll move it complete to him. First of all, I deliberation it's worthy pointing retired that we're really trying to show balanced maturation here, some successful gross and operating separator and getting backmost to double digits is simply a measurement successful nan guidance that we've wanted to make.

The lymphedema maturation assumes a maturation for nan afloat twelvemonth doubling what we did successful 2022, truthful we're surely moving successful nan guidance that we want to spell and getting backmost to double digit astir overall. It besides reflects cautious and I deliberation leverage successful nan profitability broadside demonstrating complete 30% of adjusted EBITDA maturation successful in nan guidance arsenic well.

I deliberation pinch nan AffloVest mobility astir proviso chain, we deliberation that we're beyond astir of this arsenic we participate nan twelvemonth now, truthful I deliberation that we tin attraction much connected continuing to create that business, but I deliberation astatine nan extremity of nan day, yes, there's a spot of cautiousness successful our stance. I deliberation immoderate of nan assumptions that we had connected nan debased extremity aliases things that astir apt created a small spot of be aware connected our portion was a small spot of uncertainty connected what a recession could look for illustration successful nan backmost half of nan year.

If we find that you know, we don't find nan soft landing that truthful galore of us, I deliberation dream for, and you spot an summation successful things for illustration unemployment and much unit connected user spending, those things tin surely impact co-pays and they astir apt could person moreover a bigger effect connected nan AffloVest conscionable because nan value constituent is overmuch higher than immoderate of our lymphedema products. So I deliberation those were immoderate of nan cautions that we felt.

The different is, we're continuing to put accrued power into making judge that we're trying to turn successful some lymphedema categories, and while we expect to service moreover much patients, nan maturation successful nan E0651 class evidently comes astatine a somewhat little ASP. And I deliberation nan past 1 is conscionable reasoning astir what benignant of effect nan removal of nan nationalist wellness exemption waiver pinch CMS has connected nan AffloVest business, truthful we're conscionable a small spot cautious there.

I deliberation connected nan flip broadside we surely spot opportunities from tailwinds that could emerge. So if we tin proceed to show description successful income productivity, I deliberation if nan reception to immoderate of our caller products, not only those that we introduced successful 2022, but immoderate of nan things we person successful mind for 2023 get a spot much traction, and there's ever opportunities, I deliberation for immoderate payer argumentation improvement. So those are benignant of nan bookends that framed immoderate of our thinking.

Adam Maeder

That's really helpful, Dan. I admit nan colour there. And past I conjecture I'll conscionable inquire 1 benignant of housekeeping mobility and past a followup. But connected housekeeping, AffloVest, did you spot immoderate effect to your Q4 consequence location from proviso chain? It was different bully quarter, but gross did measurement down sequentially, truthful conscionable wondering if you tin quantify immoderate imaginable effect from proviso chain?

And past for nan followup, conscionable thief america benignant of deliberation done nan commercialized statement connected nan lymphedema side. I deliberation you said you exited pinch 250 heads. Is that nan correct number for this business going forward? And whitethorn beryllium conscionable benignant of talk astir nan levers location to thrust accrued productivity successful 2023? Thanks truthful overmuch for taking nan question.

Daniel Reuvers

Sure. So connected nan AffloVest, yes, we did person a spot of proviso concatenation constraints that's still lingered into Q4. I deliberation Brent moreover mentioned immoderate of nan spot by effect connected gross margin. But again, I deliberation that we expect that we've benignant of managed our measurement done those. So I deliberation that we expect little of a headwind related to those successful 2023. It's ever going to beryllium a small spot people lumpier than our nonstop lymphedema business but pinch a 90% maturation that we still saw successful Q4, I deliberation a coagulated consequence overall.

I deliberation arsenic it relates to income caput count, Adam, yes we vanished up pinch 250, which is beautiful overmuch spot connected wherever we had intended to be. And I deliberation that we consciousness for illustration we're successful a beautiful bully spot arsenic acold arsenic nan unit that we want connected nan thoroughfare surely done nan first half and possibly deeper into nan 2nd half. If we proceed to spot immoderate description successful productivity we deliberation that, nan maturation successful headcount surely is not going to beryllium nan ramp that we've seen successful humanities years, but nan 250 we deliberation is simply a bully target for america astatine slightest done nan first half and perchance a spot deeper into nan year.

Adam Maeder

Thanks again.

Operator

Thank you. Our adjacent mobility comes from statement of Margaret Kaczor pinch William Blair. Please proceed pinch your question.

Margaret Kaczor

Hey, bully greeting everyone. Thanks for taking nan questions. I wanted to possibly spell a small further conscionable for illustration Adam did in, successful position of income guidance for lymphedema. And conscionable to cognize what we're assuming, what you're assuming fundamentally successful retroactivity versus what we saw successful nan 4th quarter. And past besides rubbing possibly a small spot connected your comments of nan VA reopening, being capable to spot those patients again, tin that thief thrust results successful 2023? And past since you mentioned nan imaginable benignant of macro impact, are you seeing immoderate of that astatine this constituent aliases that was conscionable what was contemplated successful guidance?

Daniel Reuvers

Yes, fto maine return a changeable astatine those. I deliberation from a Q4 rep productivity we were really pleased pinch nan productivity we saw connected a per rep headcount. You know, it's ever worthy reminding that Q4 is conscionable a different move pinch co-pays person mostly been addressed earlier successful nan twelvemonth connected benignant of a wide basis, we ever spot a measurement up. So it's ever our benignant of our champion 4th from a productivity standpoint. We're hopeful that we tin proceed to show expanded productivity successful 2023, but that's 1 of nan reasons that we ever spot a spot of an description there.

From nan VA question, we did spot immoderate anecdotal return to immoderate of nan VA centers, but I deliberation it's a small early to state triumph there. They look to behave successful an inconsistent mode aliases specified that, if nan aged adage, if you've seen 1 VA, you've seen 1 VA. We haven't heard astir a wide return to nan VA centers, but surely connected an anecdotal ground it was helpful. So I deliberation we're going to proceed to show that and spot if that becomes a inclination arsenic we get a small deeper into 2023.

And I deliberation connected nan macro question, yes we haven't seen overmuch successful nan look of headwinds arsenic it relates to immoderate of nan things that person created sound of caution, I think, for america successful 2023. But we besides do cognize that co-pays do person an effect connected diligent take and their expertise to beforehand pinch their therapies. If we spot immoderate alteration successful that posture, I deliberation arsenic nan twelvemonth progresses that was astir apt a spot of a sound of be aware successful really we established our guidance.

Margaret Kaczor

Okay. And past I wanted to locomotion done nan adjusted EBITDA betterment expected this year, awesome successful position of operating expenses only going up. I deliberation I heard those azygous digits versus benignant of nan guidance connected nan apical line. So I conjecture what would get you to nan precocious and debased extremity of nan range? How difficult are you benignant of pushing nan operating levers? And past really should we deliberation astir free rate travel speech for nan twelvemonth arsenic well? Thanks.

Brent Moen

Oh, yes. No. Hey, Margaret, it's Brent. Good questions. So arsenic we look astatine benignant of nan operating disbursal profile, surely and I deliberation Dan has astir apt mentioned and if not connected this call, erstwhile calls, but surely our attraction is connected nan costs to serve. So really much, really costly is it to service a diligent and really do we really bring that costs down? And truthful we've sewage dedicated attraction successful 2023 to delivering profitable growth.

So, 1 of nan things Dan mentioned successful his erstwhile reply to Adam was surely astir headcount and to nan grade we tin trim aliases astatine slightest normalize nan turnover successful our income unit that surely provides some productivity and upside successful position of leverage there. So and past connected apical of that, nan reimbursement and G&A class is going to beryllium a spot moderated from a GAAP position arsenic we won't person nan aforesaid ineligible disbursal that we had successful 2022, recurring successful 2023. So, each of those things surely are affirmative contributions to wide EBITDA separator betterment successful 2023.

Margaret Kaczor

And past nan free rate flow?

Brent Moen

Oh, free rate flow, yes, right. So we vanished nan twelvemonth astatine $22 cardinal of cash, conscionable short of $22 million. As we look into 2023, we'll make a beautiful important magnitude of rate flow, but we've sewage immoderate commitments successful 2023 that we've sewage to attraction on. They peculiarly see nan remainder of nan earnout to AffloVest, truthful we've sewage a $15 cardinal committedness provided that AffloVest continues to thrust an summation successful revenue. We've sewage immoderate CapEx obligations, albeit insignificant to nan tune of astir $2 million. We've sewage indebtedness work that we've sewage retired there. All of those things, our commitments that we have, but 1 point to support successful mind, Margaret, is that, if we moreover astatine nan midpoint, if we make $24 cardinal of adjusted EBITDA, we surely judge that we've sewage capable rate to proceed to support nan maturation of this statement and make nan basal investments for nan early arsenic well.

Margaret Kaczor

Great, convey you, guys.

Brent Moen

You bet.

Operator

Thank you. Our adjacent mobility comes from nan statement of Ryan Zimmerman pinch BTIG. Please proceed pinch your question.

Ryan Zimmerman

Good morning. Thanks for taking nan questions. Congrats connected a bully extremity of nan twelvemonth and Brent congrats connected your retirement. I don't cognize if this is for illustration a Tom Brady type retirement, you mightiness travel backmost successful a year, but we do admit moving pinch you complete nan years done this institution and others. I want to inquire astir nan semipermanent guidance that you're putting retired location Dan, if I do nan math, it looks for illustration I've sewage a 12%, 13% CAGR complete nan adjacent fewer years. Just thief america understand benignant of nan cadence of your expectations, really to deliberation astir that CAGR and benignant of arsenic we get retired to 2025 and truthful forth?

Brent Moen

Yes, I deliberation first of all, nan logic that we put out, fto maine return a measurement back, nan logic we put retired nan 2025 numbers was, I deliberation arsenic we've emerged from nan post-COVID environment, there's been an liking successful what does nan early look like. And while we wanted to intelligibly springiness 2023 guidance today, I deliberation nan mobility continues to beryllium benignant of what's connected nan different broadside of nan horizon. That's why we established those 25 numbers. We're -- we'll give, arsenic we did coming 2023 guidance. We're not going to break retired 2024 and 2025 astatine this point. And if we recovered ourselves location a spot early, we'd beryllium delighted. But I deliberation nan constituent we were trying to make was, from an investor's standpoint we deliberation that there's accordant double-digit maturation successful beforehand of us.

We deliberation nan opportunity to found an expanded adjusted EBITDA floor plan to nan tune of 50 cardinal by 2025. And past nan free rate travel piece, I deliberation is an important 1 that we tried to found arsenic well. To Brent's point, he benignant of walked done rate needs and rate procreation for 2023, but erstwhile we get to 2024 and 2025 beyond nan gain retired payments we deliberation that we go a really patient rate travel generator and that's an important portion of nan profile, that we dream to definitive is group benignant of contemplate us.

Ryan Zimmerman

Okay. That's very helpful. And then, Dan, you benignant of hinted at, nan pipeline getting much robust and conscionable a dependable watercourse of updates. Maybe I don't want to bargain nan thunder here, but tin you grow a small spot connected benignant of what you're reasoning and wherever you spell complete nan adjacent fewer years from a caller merchandise standpoint?

Daniel Reuvers

Sure. Yes, caller merchandise improvement continues to beryllium an important 1 for us. We want to make judge that we proceed to show ourselves arsenic a leader and making judge that nan diligent acquisition progressively becomes much consumer-like arsenic portion of that journey. I tin surely adhd specifically successful 2023 successful nan first half, we're going to present conscionable a statement hold connected AffloVest. We person a size spread connected immoderate of nan larger patients that we couldn't accommodate, and we'll beryllium introducing that successful nan first half.

We're besides going to refresh our entree instrumentality successful nan first half of nan twelvemonth pinch immoderate characteristic enhancements. As I mentioned earlier, competing successful nan 651 aliases introduction level pump abstraction is going to beryllium important for us, we judge to service each nan patients. So, we're not going to neglect that space. And past successful nan 2nd half Ryan, we're going to, we're looking guardant to introducing nan equilibrium of our ComfortEase portfolio, truthful successful nan precocious extremity garments.

Those are devices that thief patients that are oncology survivors, typically pinch caput and cervix crab survivors aliases bosom crab survivors that tin dainty nan caput and neck, nan limb and nan chest. That we deliberation is going to induce america into an opportunity to spell revisit nan oncology abstraction pinch a really bully caller solution.

And past there's a bid of caller Kylee drops that we'll person complete nan people of nan year. Kylee coming now enables a diligent to way their order. That's thing we couldn't person allowed aliases enabled not very agelong ago. It allows them to get immoderate training assistance, which tin trim our costs to serve, erstwhile they tin self-serve successful immoderate of those areas and past sharing stats pinch their physicians.

In nan 2nd half, we're looking guardant to immoderate further features connected Kylee. Patients will beryllium capable to way measurements. They'll beryllium capable to get reminders and encouragement prompts to make judge they person nan champion benignant of result arsenic possible. And immoderate bid processing engagement, which again comes backmost to costs to serve. So those are immoderate of nan things I deliberation that, you tin expect successful 2023. And past we person immoderate longer word things, which I'll conscionable propose proceed to attraction connected treating nan therapy for illustration a regular user acquisition and those will apt show themselves successful nan outer windows.

Ryan Zimmerman

I admit each nan colour and congrats again, solid, awesome extremity to nan year.

Daniel Reuvers

Thanks Ryan.

Brent Moen

Thanks Ryan.

Operator

Thank you. [Operator Instructions] Our adjacent mobility comes from statement of Suraj Kalia pinch Oppenheimer and Company. Please proceed pinch your question.

Suraj Kalia

Good morning, Dan, Brent, tin you perceive maine each right?

Daniel Reuvers

We can. Good morning, Suraj.

Suraj Kalia

First and foremost, fto maine echo nan sentiments. Brent, it's been a pleasance moving pinch you done nan years and wish you each nan occurrence successful your adjacent endeavor. So Dan, a fewer questions astatine slightest from my side, maybe, Brent tin besides jump in. Dan, erstwhile we look astatine nan number of tenured reps, really galore would you opportunity are, “Tenured”, really galore would you opportunity presently have, let's opportunity 1 million, 1.5 cardinal yearly productivity? You know, which is usually benignant of what nan target you'll person talked to successful nan past?

Brent Moen

Yes, Suraj, it's Brent. I'll return a changeable and past Dan tin chime in. But, I deliberation arsenic we exited 2021 we saw larger than normal turnover successful our income rep class and I deliberation that led to immoderate of nan things we communicated back, successful nan backmost half of 2021. Throughout 2022, we've seen bully occurrence successful being capable to get our income unit backmost to wherever we judge we tin prolong maturation successful 2023.

So successful position of nan turnover, our turnover connected an mean basis, we expected it to beryllium astir 20% range, and it was outsized successful 2021. So you tin ideate that nan expertise to go productive surely started to show itself successful nan second half of 2022 and will proceed to supply use into 2023. But we we're going to talk a small -- talk overmuch astir nan number of reps that are astatine that point, truthful but bully progress.

Suraj Kalia

Fair enough. And past mates of questions, I'll inquire some of them. One for you, Brent, 1 for Dan, and I'll hop backmost successful nan queue. So Brent, first successful position of nan FY 2023 guide, forgive maine if I missed it, I cognize you'll springiness nan wide lymphedema growth, but I'm much willing successful nan commercialized constituent of it, if you could springiness immoderate further colour there? Also, what was nan effect of ASPs pinch ComfortEase and others to nan guide? And past specifically for you successful position of Kylee, possibly I'm conscionable looking astatine it from a purely engineering perspective, right? It's a awesome measurement up successful position of information gathering and presumably it's passive successful nature. Could it go much assistive successful nan future, i.e. improving compliance and functionality? Gentlemen, convey you for taking my mobility and Brent congrats again.

Brent Moen

Thanks, Suraj. I admit that. So I'll supply a small spot of colour connected commercial. I deliberation your first mobility was what we should expect from commercial? And I'll conscionable beryllium honorable pinch you, Suraj, we don't forecast by payer successful position of expectations complete nan people of nan year. Our attraction is identifying patients and making judge that we tin supply nan therapies basal to those patients. And whether it's a Commercial diligent aliases a Medicare diligent aliases a VA patient, each of them are, we look astatine equally. So we don't supply overmuch colour comparative to wherever nan commercialized anticipation is comparative to that.

Daniel Reuvers

Yes, I deliberation conscionable to adhd to that Suraj, we did person a peculiarly bully 4th arsenic it relates to the, nan Medicare operation successful Q4, which you, I fishy recognized and I deliberation that it's little astir focusing connected a payer and much astir a prescriber source. So nan vascular telephone constituent has continued to beryllium an important 1 to us, nan truth that we person bilateral solutions including trunk, which serves nan full request of those patients.

And I deliberation that ComfortEase has started to unfastened nan eyes of immoderate prescribers perhaps. They whitethorn person considered aliases been dismissive of an older diligent conscionable reasoning it was going to beryllium excessively difficult. And nan summation of zippers and making it easier to use possibly has I deliberation gotten immoderate prescribers to see patients they whitethorn person different overlooked. I deliberation nan different 1 was this elimination of nan Cmn gave america an opportunity to spell successful and revisit pinch prescribers connected process and anytime we person a chance to prosecute pinch them it's typically a bully opportunity and I deliberation that those some were a spot reflective successful Q4.

And I deliberation your question's a bully 1 connected Kylee. So Kylee has successful my mind 2 different identities. One is it tin proceed to trim our costs to serve, being capable to way their order, schedule a training, negociate nan bid process, each of those things person historically been done successful a very manual ground pinch a batch of group successful our agency doing individual outreach connected nan telephone. And we each cognize that that's not nan astir businesslike measurement successful 2023 and nor nan measurement astir businesses operate.

So I deliberation Kylee is simply a conveyance that will proceed to thief trim costs to serve. On nan flip side, I deliberation nan different constituent of its personality is precisely what you described, which is nan expertise to summation compliance and besides to guarantee that nan diligent has nan champion therapeutic outcome. So nan mention I had astir being capable to stock their advancement pinch their expert doing reminders and encouraging prompts connected their handheld arsenic it relates to celebrating erstwhile they've been accordant successful their therapy aliases encouraging them erstwhile they haven't are some components that I deliberation tin thief arsenic well.

Operator

Thank you. We are presently seeing nary remaining questions astatine this time. That does reason our convention today. Thank you for your participation. You whitethorn now disconnect your lines.