Tactile Systems Technology Inc Q4 FY2025 Earnings Call

Welcome, ladies and gentlemen, to the Fourth Quarter and Full Year 2025 Earnings Conference Call for Tactile Medical. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. I would now like to turn the call over to Sam Bentzinger, Investor Relations at Gilmartin Group, for a few introductory comments. Please go ahead.

Good afternoon, and thank you for joining the call today. 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 to be filed with the Securities and Exchange Commission as well as our most recent 10-Q filing. 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 Investor 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 fourth quarter and full year 2025 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. 2025 was a pivotal year for Tactile Medical as we advanced our mission of improving the lives of over 95,000 patients with lymphedema and chronic inflammatory lung disease while also strengthening the foundation of our business for scale. Through disciplined execution across our commercial and operational strategies, we delivered strong profitable revenue growth while continuing to make critical investments in people and workflow-related processes. Total revenue for the full year was $329.5 million, a 12% increase year-over-year. Beyond the top line, we expanded our full year gross margins by 190 basis points year-over-year to 75.9%. And adjusted EBITDA increased 21% year-over-year to $44.8 million. From a cash perspective, we repaid the full outstanding principal balance of $26.3 million to retire our term loan and repurchased $26.5 million of our stock. We ended 2025 with $83.4 million in cash and cash equivalents and generated close to $43 million in operating cash flow during the year. This strong cash generation is durable and positions us to continue reinvesting in the business and drive growth in 2026 and beyond. Our focus on strategy, refinement and execution throughout 2025 culminated in a strong Q4. The commercial momentum we described during our last call persisted through the fourth quarter, and we delivered total Q4 revenue growth of 21% year-over-year, resulting in $103.6 million of revenue. By business line, lymphedema revenue increased 16% year-over-year to $89.5 million and airway clearance revenue increased 66% year-over-year to $14.1 million. For 2026, we expect total revenue to be in the range of $357 million to $365 million, representing year-over-year growth between 8% and 11%. This outlook reflects the strength of our expanded sales force, improving sales rep productivity and our market-leading positions in both lymphedema and airway clearance therapy while also incorporating a potential short-term market impact from the recently announced Medicare prior authorization requirement for pneumatic compression devices. Importantly, this outlook also reflects our proven ability to adapt and execute effectively in a dynamic reimbursement environment. Elaine will elaborate more on this guidance and new prior authorization requirements shortly. In addition to our strong Q4 and 2025 financial performance, this afternoon, we announced our acquisition of LymphaTech, a privately held medical technology company pioneering a novel approach to assessing and monitoring fluid in patients with chronic swelling such as lymphedema. This is an exciting milestone in Tactile's evolution from a product-based company to a comprehensive integrated lymphedema solutions leader, and I believe it has meaningful potential to enable more accurate identification of lymphatic dysfunction, adoption of lymphedema therapy and new capabilities to inform future product development. For the remainder of the call, I will review our strong Q4 performance by business line and then discuss our acquisition of LymphaTech in more detail. I will then provide updates on our ongoing strategic priorities, which we anticipate will continue to drive momentum through 2026. As a reminder, these priorities include improving access to care, expanding treatment options to optimize patient care and reinforce our market-leading position and enhancing the lifetime patient value with both products and services, given the chronic nature of the disease states we support. Elaine will follow with a review of our full fourth quarter results and outlook for 2026. With that, let's turn to a deeper review of our fourth quarter performance. In our lymphedema business line, we grew revenue 16% year-over-year and 24% sequentially in Q4, demonstrating sustained momentum and the strength of our recovery over the past several quarters. The drivers of performance are consistent with what we highlighted previously and reflect continued execution of our go-to-market commercial strategy, which integrates both people and technology. On the people front, as mentioned last quarter, we achieved our year-end goal for sales rep hiring and remain pleased with the caliber of our recently hired reps. This phase of our go-to-market strategy is now behind us, and we believe we have the appropriate rep coverage in place to meet and drive demand across all geographic locations. The rebalance of our sales force infrastructure and accelerated hiring have enabled us to achieve a ratio of 1 account manager to 1 product specialist, a staffing model that will support and optimize productivity based on the diversity of clinical selling and order support activities that are required in the field. With our go-to-market playbook in hand, we will strategically add field resources as needed as we continue to refine territory splits and scale over time. Sales productivity has been further aided by technology, including the introduction of our CRM in February of last year. The CRM capabilities that launched and enhanced over the past 12 months have been invaluable in supporting visibility, accountability and sales effectiveness, and we will continue to strengthen the tool with additional features and functionality enhancements, including more data and analytics, to ensure our field organization is equipped with the right resources and insights to drive referral growth and customer value. We have strong confidence and conviction in the market and our approach to commercial execution. The combination of clear territory design, intentional resource staffing, a robust and integrated CRM and detailed provider channel strategies and tactics position us well for 2026 and the years ahead. Regarding our payer mix, our Medicare channel remained particularly strong in Q4, driven by a couple of factors. In addition to continuing to lap a softer prior year comparison resulting from the documentation challenges that began in Q2 of 2024, we also began to see patients who met the new NCD unique characteristics requirement move directly to our Flexitouch advanced pump after completing conservative therapy without first undergoing a basic pump trial. This is a big win for patients, which ultimately accelerates access to the most appropriate therapy for their condition, and we are pleased to see momentum growing. Turning now to airway clearance and patients we support with chronic inflammatory lung disease. Sales of AffloVest increased 66% year-over-year and 6% sequentially in the fourth quarter to conclude an incredible year for this business line. We are thrilled with this performance, which is a testament to our focused commercial strategy as executed by our skilled airway clearance field team. As broader awareness of bronchiectasis and its available treatment options continues to expand, so does demand for AffloVest. While the claims data are lagging, we believe we have now achieved a market-leading position in the airway clearance category as our commercial momentum accelerates, supported by the strong partnerships and prioritized placement agreements we have secured within the top 10 respiratory DMEs. In 2026, we expect growth in airway clearance to normalize as compared to the elevated level achieved in 2025. From a commercial execution perspective, we will continue to focus on what has worked so well for us to date, strengthening our relationships with each of our top DME partners, penetrating deeper within these accounts, providing high-quality medical education and training for providers and DME staff and launching an enhanced AffloVest therapy to better serve patients. With that backdrop on our Q4 results, I would like now to discuss our acquisition of LymphaTech in more detail. As mentioned, this is an exciting development for Tactile that adds both breadth to our current capabilities and depth to our R&D. Specifically, with LymphaTech, we are expanding our current market-leading portfolio of lymphedema solutions with digital 3D scanning technology for chronic swelling measurement and monitoring, while broadening our R&D with new competencies and programs to extend LymphaTech's current capabilities into next-generation approaches for disease assessment and treatment. Taken wholly, this acquisition strengthens our market leadership in conditions associated with lymphatic dysfunction, and we expect it to meaningfully contribute to our ongoing strategic priorities of improving access to care, expanding treatment options and enhancing the lifetime patient value. LymphaTech's primary technology is a handheld clinically validated solution that uses proprietary algorithms and mobile scanning to deliver highly accurate fluid volume and precise circumference measurements. These elements, along with skin changes, are critical to identifying lymphedema and informing the appropriate therapy options. The LymphaTech platform immediately generates a full clinical-grade 3D model of the body and limbs, replacing traditional manual measurement methods that are time-consuming, highly variable and dependent on clinician techniques. When combined with clinician assessment of the skin, the platform delivers clinicians with a more accurate, repeatable measurement that reduces variability and streamlines clinical workflow. By introducing greater objectivity and efficiency into lymphedema assessment, the platform helps instill confidence in clinical decision-making and enables providers to focus more time on patient care. In addition to real-time measurement, the platform also supports longitudinal surveillance and monitoring, allowing clinicians to track changes over time, including disease progression and treatment response. Beyond clinical benefits, the patient experience is next level. The 3D model measurement output offers a compelling visual of the patient's chest, trunk, head, neck and/or limb, helping them to better understand their condition and keep them engaged in their disease management throughout the care journey. We expect these digital measurement capabilities to enable more accurate disease identification and thereby, accelerate therapy access for the 20 million undiagnosed symptomatic patients in the United States. This acquisition is a milestone in Tactile's evolution from a product-based company to a comprehensive integrated solutions leader for lymphatic dysfunction. By bringing Tactile and LymphaTech together, we become uniquely positioned to support patients and clinicians from early identification and intervention to innovative connected therapy with long-term support and monitoring alongside our Kylee patient engagement application. We expect this acquisition to directly support our longer-term strategy as we seek to capitalize on the growing scientific and clinical understanding of lymphatic dysfunction and lead the next wave of technological innovation. We are very excited about this announcement and for the LymphaTech team who share our combined passion for providing advanced solutions to large underserved patient populations to join Tactile. We will provide additional details regarding the integration on subsequent calls. Turning now to recent updates on each of our three strategic priorities. These priorities are designed to unlock our TAM and enable scalable, profitable growth, and they will continue to be areas of focus for us as we move through 2026. I will begin with an update on our foundational priority to improve access to care, specifically with respect to our head and neck lymphedema, RCT. First, I'm pleased to share that the 2-month results from our RCT comparing Flexitouch Plus to usual care in patients with head and neck lymphedema were published in the Journal of the Sciences and Specialties of the Head and Neck in January. These results, which were initially presented at the ASCO Annual Meeting last June, concluded that Flexitouch Plus is an effective first-line treatment for head and neck cancer survivors with lymphedema compared to receiving therapist-guided treatment without a compression device. Second, following the presentation of long-term data from our RCT at the ACRM Fall Conference in October, I'm also pleased to report that the 6-month manuscript has been submitted and is currently in review. Additional manuscripts will be submitted this year and include a deeper analysis into structural barriers associated with usual care and the role of device technology in more quickly addressing the debilitating symptoms of this population. This is truly a landmark study. Never before has there been a large RCT assessing short- and long-term outcomes of advanced pneumatic compression therapy as an evidence-supported alternative to usual care in treatment-naive head and neck cancer survivors with lymphedema. We are leveraging these data to support our ongoing discussions with commercial payers regarding their current experimental and investigational policy language for head and neck lymphedema device therapy. Clinical data and patient value examples like these strengthen our oncology channel engagement and help to increase awareness of the clinical benefits of Flexitouch Plus for patients in this therapeutic area. While extensive coverage has not yet been fully opened, we are encouraged by the growing momentum and interest, and we'll continue to work with commercial payers to influence their policies and reduce access barriers. Beyond clinical evidence, we are also focused on improving access to care by transforming each step of the order process through the implementation of new technology and more efficient workflows. A key component of this effort is the use of AI-enabled technology to improve speed, accuracy and efficiency for PCD orders. During the fourth quarter, we successfully completed the first phase of our new AI platform, implementing it across our order intake process as well as for certain parts of our medical record review, specifically for orders in our Medicare channel. With the foundation set and early learnings gleaned from the initial rollout, we will continue expanding the use of this technology across the entire order process this year, including patient eligibility and verification of benefits, full medical record review and order qualification and prior authorization. Once fully implemented, we expect this technology to accelerate speed to therapy, reduce revenue impacting errors and improve operating efficiency, each of which should contribute to enhanced operating margins moving forward. I would like now to spend a few moments discussing our product roadmap for 2026 and broader strategic priority of expanding treatment options. This priority spans both business lines and is centered on identifying ongoing unmet needs and addressing them through patient-centric innovation. We delivered on this in 2025 with the introduction of Nimbl for upper and lower extremity lymphedema and continue to be very pleased with patient and clinician adoption. Nearly a full year into its launch in a crowded market, we have moved into a market leadership position in the basic compression pump category, and we expect to continue growing this category and serving more patients with Nimbl. Product innovation will unlock future growth opportunities. And as we look ahead to this year and beyond, there are two specific additional areas of innovation I would like to highlight. First, on the airway clearance side. In early Q4, we submitted a 510(k) to FDA for our next-generation AffloVest product. While the product remains under FDA review, we expect to commercially launch it later this year to ensure it's available for the 2026 to 2027 winter respiratory season. We are very excited about this next-generation device, which will feature further weight reduction, the addition of digital connectivity and improved sizing adjustability to allow for a more customized fit. We are confident these enhancements will support the patient experience while promoting adherence. Our second innovation area is focused on the advanced pump category. Our roadmap includes the phased introduction of incremental features and product enhancements for Flexitouch, including making the device smaller, lighter, more user-friendly and with less external hosing. These updates will support the patient experience, and we will provide additional updates as we progress through our product development cycles this year. Additional enhancements will follow and may include new features that change the way therapy is delivered. With the acquisition of LymphaTech, we now also have access to an expanded capability skill set and a separate product roadmap from their development team. Over the next few months, we will be looking for roadmap integration points being deliberate and strategic to ensure new therapies and product designs improve the patient experience without compromising therapy effectiveness. Our third strategic priority is aimed at enhancing the lifetime patient value by supporting lymphedema patients across the full care continuum, encompassing a more efficient and personalized engagement before, during and after the order and delivery process. In 2026, we plan to continue focusing on targeted care navigation pilots, leveraging our existing resources to further solidify patient engagement throughout the complex and drawn-out order process and reduce patient leakage. These pilots are designed to proactively reach patients at key moments in the care journey, helping set expectations, reinforce required next steps and support timely progression through the order workflow. Our initial pilots have demonstrated proof of concept, showing that patients value clearer communication and guidance earlier in the process. While we continue to evaluate longer-term technology investments, our near-term focus remains on refining these pilots optimizing communication touch points and expanding their impact in a measured and scalable way. We believe this approach will improve yield, enhance the patient experience and over time, reduce the need for sales rep involvement in the order process. As you can see, we are continuing to execute well across a diverse set of strategic priorities that are designed to unlock our TAM and drive consistent growth over the near, mid and longer term. In each of these areas, we have multiple catalysts ahead, including continued commercialization acceleration and progress across our product and clinical roadmaps, which we expect will support our momentum moving forward. With that, I will now have Elaine review our Q4 financial results in more detail and provide an update on our guidance and outlook for 2026.

Thanks, Sheri. Unless noted otherwise, all references to fourth quarter financial results are on a GAAP and year-over-year basis. Total revenue in the fourth quarter increased by $80 million or 21% to $103.6 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch entree and Nimbl systems, increased $12.4 million or 16% to $89.5 million. And sales of our airway clearance products, which includes our AffloVest system, increased $5.6 million or 66% to $14.1 million. Continuing down the P&L, gross margin was 78.2% of revenue compared to 75.2% in the fourth quarter of 2024. The increase in gross margin was attributable primarily to lower manufacturing costs and stronger collections reflected in our revenue. First quarter operating expenses increased $10.4 million or 20% to $62.2 million. The change in GAAP operating expenses reflected a $4.7 million increase in sales and marketing expenses, a $0.5 million increase in research and development expenses and a $5.2 million increase in reimbursement, general and administrative expenses, including and primarily driven by strategic investments. Operating income increased $6.3 million or 50% to $18.8 million. Interest income decreased $0.3 million or 28% to $0.7 million due to our decreased cash position. Interest expense decreased $0.5 million or 98% to $11,000. Income tax expense increased $5.5 million or 169% year-over-year to $8.8 million. Net income increased $0.9 million or 9% to $10.6 million or $0.46 per diluted share compared to $9.7 million or $0.40 per diluted share. Adjusted EBITDA increased to $22 million compared to $16.2 million. With respect to our balance sheet, we had $83.4 million in cash and cash equivalents and no outstanding borrowings at quarter end. This compares to $94.4 million in cash and $26.3 million of outstanding borrowings as of December 31, 2024. Turning to a review of our 2026 outlook. For the full year 2026, we expect total revenue in the range of $357 million to $365 million, representing growth of approximately 8% to 11% year-over-year. This guidance assumes our lymphedema and airway clearance businesses will grow in a similar range, with airway clearance growing modestly faster. As typical, our guidance range reflects several factors, including expected strength in airway clearance and ongoing commercial momentum in lymphedema driven by our go-to-market strategy. This guidance contemplates a recent Medicare regulatory update related to pneumatic compression devices. Specifically in January, CMS announced a new prior authorization requirement for basic and advanced pneumatic compression device codes under traditional Medicare fee-for-service. With this update, medical device suppliers will be required to obtain prior authorization before furnishing these devices and submitting claims to Medicare beginning April 13. To step back for a minute, Medicare policy in our category is and has been a dynamic and evolving environment. The pneumatic compression device codes impacted by this recent change have been included on the DME master list for many years, meaning that they were eligible to be selected for prior authorization at any time. It is our understanding that as part of CMS' annual review and update process, certain DME categories are periodically moved to the required prior authorization list to provide additional oversight. This update reflects that broader CMS process and is not specific to Tactile or unique pneumatic compression devices. Ultimately, this new requirement will add additional administrative steps to the order process for Medicare fee-for-service patients. As the industry adjust to this requirement, we expect a temporary short-term impact across the broader lymphedema market, which we've incorporated into our guidance for 2026. Importantly, we do not expect this change to alter our ability to deliver growth in line with the overall lymphedema market during this period. As the industry leader and a DME provider with longevity in this market, we believe we are best positioned to navigate this change. We already have extensive experience operating in other prior authorization environments across Medicare Advantage and commercial plans. And the investments we made in 2025 to strengthen our back-office infrastructure, documentation workflows and payer engagement capabilities position us well to navigate this transition efficiently. Once the industry has adjusted, we expect the lymphedema market to return to its normal growth trajectory. As that occurs, we believe our scale, experience and operating discipline position us to perform at least in line with the broader market. More broadly, we believe this change can benefit patients by helping ensure therapies are clinically appropriate and supported by evidence, promoting more consistent and timely access to care with fewer coverage disruptions. As always, we will continue to work closely with clinicians, payers and patients as the industry navigates this change to support seamless access to therapy and optimize patient outcomes. Turning to quarterly shaping, we expect Q1 growth to be higher than the balance of the year, driven by the timing of last year's recovery with growth moderating as we move through 2026. With that backdrop, for modeling purposes for the full year 2026, we expect our GAAP gross margin to be approximately 76%, our GAAP operating expenses to increase 8% to 10% year-over-year as we annualize our sales organization investments and advance our tech-related investments throughout the year, net interest income of approximately $3 million, a tax rate of 28% and a fully diluted weighted average share count of approximately 22 million to 23 million shares. We expect to generate adjusted EBITDA of approximately $49 million to $51 million in 2026. This outlook reflects the annualization of 2025 investments and continued strategic initiatives in 2026, which we believe are important to support long-term growth and operating leverage. Our adjusted EBITDA expectation assumes certain noncash items, including stock compensation expense of approximately $9 million, intangible amortization of approximately $3.6 million and depreciation expense of approximately $3.2 million. With that, I'll turn the call back to Sheri for some closing remarks.

Thank you, Elaine. Our Q4 and full year 2025 financial performance was strong, and we are very proud of our accomplishments and momentum. We are executing well against our strategic priorities, and our investments in people and various workflow processes are materializing and paying off as expected. The foundation we have built over the past year gives us confidence in our ability to continue delivering consistent performance in line with overall market growth. With multiple catalysts ahead, including continued commercial momentum and progress across our product and clinical roadmap, we believe we are entering 2026 from a position of strength. As we have seen, the lymphedema payer policy environment is adjusting. And as the industry leader, we are well prepared to react and effectively respond to any change that may arise. We have confidence in our business and look forward to sharing updates with you as we move through 2026. I'd like to thank our team here at Tactile for their combined efforts in 2025. Without them, none of what we achieved would have been possible. With that, operator, we'll now open the call for questions.

Our first question will come from Adam Maeder with Piper Sandler.

This is Kyle Winborne on for Adam. Congrats on a good quarter. I guess I'd like to start with the lymphedema business. Performance was strong again in Q4 and really started to pick up momentum there in the back half of last year. Can we just drill into what drove this a little more? Did you start to see the NCD interpretation kind of fully turn into a tailwind there in Q4 as you discussed? Just seeing really good productivity and performance as a result of the increased headcount like you discussed in the prepared remarks. Can you just kind of unpack the performance there for us?

Yes, Kyle, you covered most of my points. In Q4, we experienced a combination of investments in our people, processes, and technology that enabled us to exceed expectations. The CRM system we launched about a year ago saw strong adoption by Q4, integrating seamlessly into our sales workflow. We also focused on increasing our number of representatives, which accelerated hiring and onboarding in Q2 and Q3, leading to greater productivity in Q4. Additionally, we observed some positive impact from Medicare patients transitioning directly to Flexitouch under the new NCD criteria, although we waited for more clarity on the policy before fully leveraging that opportunity. This momentum looks promising as we move into 2026. Furthermore, our airway clearance business performed admirably due to our strategic partnerships, training, and education efforts. All these factors contributed to an outstanding quarter and an exceptional year overall.

Great. That's super helpful. I guess to follow up then on the lymphedema business as we look into '26, and just kind of understanding the guidance that you gave maybe kind of around that top line growth number for the total business and I guess as we think about some of these new prior auth requirements that you discussed, along with maybe some of these tailwinds that we're just starting to kick in from the NCD; I mean, can you just kind of help us balance the two? I mean did they kind of offset? How did you piece maybe kind of some of those headwinds and tailwinds there around reimbursement for 2026?

Sure. So very consistent with our guidance philosophy, our outlook that we put forward really incorporates a very balanced and thoughtful approach based on the information we know at the time. So if I look on the momentum and the tailwinds, we have the NCD. We have a much more seasoned sales organization. They're coming in strong. We basically, at the end of Q4, have the total number of reps we need. We have that ratio of a 1:1 that we talked about. So for every account manager, we also have a product specialist. Nothing has changed in terms of that patient population. We still have this underserved population. We have very strong channel strategy. So all of those things are in place, and we anticipate continuing to drive forward. For sure, the change that the Medicare requirement is asking for in the prior auth is a change than we had seen in 2025. But the fact is that we are going to be prepared for this. We already do prior authorization in our commercial business. We have to stand it up for Medicare. Medicare has never prior authorized this category before, so they'll be learning as well. So we felt it was prudent to not get ahead of our skis on this. We are prepared, we will address this. And as we work through what it takes and what that patient flow looks like, we always have the opportunity of adjusting our guidance in Q3 as we get more experience in this area. But yes, we did a balance of headwinds and tailwinds, but this prior auth is a shorter-term headwind and one that we feel very prepared to address.

Our next question comes from Ryan Zimmerman with BTIG.

This is Izzy on for Ryan. I apologize for any background noise. I also want to echo the congrats on the solid quarter as well. So just to start, I was curious if you could talk a little bit more about the LymphaTech acquisition that you guys announced today. Any color that you can provide on the expected commercialization model or high-level thoughts that we can think about for 2026 and our models with that deal coming in?

We are very enthusiastic about this acquisition for our business. Many of you have been asking how we can access the 20 million undiagnosed patients in the U.S. with lymphedema. This acquisition aligns perfectly with our overall strategy in providing comprehensive care. We are particularly excited because they already have a commercialized product. Currently, the commercialization model involves using it for measurement and surveillance with compression garment manufacturers for digitizing fitting and ordering. A few centers are also incorporating it into their workflow. In the long run, we envision integrating LymphaTech into our commercial operations and equipping our sales representatives to adopt a strategic segmentation approach to market this in centers that handle high volumes, where improving workflow efficiency will be impactful. Additionally, the patient experience is enhanced as they won’t have to deal with measuring tape discrepancies, allowing them to see the fluid volume in their limbs without any physical contact. While we are not currently incorporating it into our sales representatives' offerings, it is available in the market. We also have a regulatory and reimbursement strategy in place, which we will work to develop further to ensure a payment mechanism exists for clinicians using the tool. More specific work will take place as we proceed with the integration. We are truly excited to add this to our portfolio, reinforcing our strategy to lead in this field and provide a complete continuum of care solutions for patients and clinicians.

Got it. That's helpful. And then just to go back to the guidance for a second. I was curious what will get you to that 8% versus that 11%, understanding all of the headwinds and tailwinds that you called out for the year and the reimbursement dynamics as well.

Sure. From a lymphedema perspective, we believe that we will grow at the same rate as the market, but we anticipate that prior authorizations may slow some of that growth. The 10% compound annual growth rate includes years of higher and lower performance, influenced significantly by reimbursement factors. I suspect that achieving an 8% growth rate could be challenging due to the complexities of prior authorizations, which require manual reviews rather than automated ones. There may be delays if reviewers are overly cautious or not adequately trained. However, there are no fundamental issues disrupting our business. We have a solid patient base, our distribution channels are strong, our sales force is at its largest, and we're enhancing our back-office operations with CRM tools. All these factors should help offset any temporary challenges we might face.

Our next question comes from Brandon Vazquez with William Blair.

I wanted to follow up on the last one on the NCD changes. Maybe you can just start, give us a little bit more color. You mentioned you've been doing prior auth on the private side already for a little while. Talk to us a little bit about what does that process look like? You have a lot of CMS and private experience now. So how much could a prior auth process lengthen that process for the CMS patients specifically? And in part because I'm trying to understand what's embedded within the '26 guidance. Does the market contract for a quarter or 2 before it returns to growth? And is that what's embedded in your guidance? Or does this remain a growth market for the next couple of quarters?

Yes. I'm going to hand it over to Elaine to discuss some specifics. You mentioned a change in the NCD, and I want to clarify that nothing is changing with the NCD. The NCD remains in effect, and we believe it has become a headwind, allowing patients who meet the criteria for an advanced pump to receive one. This situation differs from the new Medicare fee-for-service policy regarding prior authorization, which is not connected to the NCD. I'll let Elaine explain what the prior authorization process looks like in our commercial business.

Yes, the process involves curating a package that typically includes a cover document with specific information sought by a payer, along with all supporting evidence such as medical records. This submission can be made through their portal, and we usually find responses by checking that portal. However, this can extend the process. We have experienced both fast and slow turnaround times from different payers in the commercial space. There has been significant public focus on achieving quicker turnaround times for prior authorization, with an aim to complete this within a week, and we are hopeful to see similar results with Medicare. To address your point about whether this is a short-term slowdown for the industry, we believe there are no fundamental changes occurring; we simply need to adapt to this new process. This involves understanding the technical requirements and the specific components necessary for the submission packet, as well as efficiently transferring information to and from Medicare, taking into account their unique requirements. We are well-experienced and equipped with new technology that allows us to quickly implement changes. While we acknowledge this could temporarily slow industry growth, we feel well-prepared to manage this situation and do not view it as a significant long-term challenge.

Okay. Great. Elaine, I believe this might be the best EBITDA margin quarter in the company's history. Can you share some insights on where you're finding the most leverage? Additionally, what potential do you see for the EBITDA margin going forward? You've provided guidance for 2026, but where do you identify the greatest opportunities for further leverage within the profit and loss statement?

Yes. So yes, thank you for that. That's something that we've been excited about being able to grow profitability. And if you go back to where we started the year, this is much better than we expected. So I think a combination of really good discipline from a cost management perspective as well as starting to see benefit from those investments that we've been making. So we've talked about even some of the AI tools, and they are starting to pay off. As we move into this year, you'll see that our guide suggests an increase to a more modest one, and this is a combination of us annualizing some of the investments such as our sales force. We didn't carry the expense for the full year. We will in this coming year in 2026, as well as continuing to finish out the strategic investments that are underway now. So we're happy that we're going to be able to continue to expand margins, albeit a bit more modestly this year while we're able to continue those investments. Longer term, once we get these investments behind us, we do expect to see gross margin rate grow at a faster pace than we're suggesting for 2026.

We'll go next to Ben Haynor with Lake Street Capital Markets.

First off for me, just for clarity's sake on the prior authorization, it doesn't sound to me like you have the specific requirements that CMS is going to be demanding. And just based upon your work with commercial insurers in the past, it doesn't sound like either that there's anything that is kind of out of the box where clinicians are not used to kind of collecting the data, and it's more of a question of how quickly CMS can turn it around. Is that the right way to think about this here?

We have been learning about Medicare on a daily basis. We understand the forms we need to complete and have a solid grasp of what Medicare requires for a successful claim. This understanding should benefit our prior authorization process. However, there are technical aspects regarding the best submission methods and potential differences in prior authorization requirements. Each payer operates differently, so there isn't a standardized solution. We're eager to utilize our new AI technology to streamline this process. We believe this will not only enhance our efficiency but also accelerate the turnaround time for patients.

Sure. Thank you for that clarifying point, Elaine. So to specifically answer your original question, yes, we do agree that the clinicians are used to collecting the required data points from prior experiences. And the real challenge will be in the turnaround and efficiency of CMS's processes, which we are gearing up to navigate as best as we can.

Okay. Great. That's helpful. And then just on the bronchiectasis drug that launched here a number of months ago, are you seeing any impact in terms of growing the market there? What's kind of any color that you have there?

Sure. The patient population in our airway clearance business closely resembles the underserved and underdiagnosed population we encounter in lymphedema. The growth in bronchiectasis awareness has largely been driven by pharmaceutical companies, resulting in increased disease awareness and enhanced training and education for the pulmonology and respiratory community. Consequently, we have observed a notable uptick in interest. Importantly, there are no guidelines or clinical decisions suggesting that a drug should precede this therapy; they are designed to be used in conjunction. While drug therapy mitigates inflammation, it does not address mucus clearance, which poses a significant issue for patients susceptible to mucus buildup and infections. Thus, these therapies will complement each other effectively. We value the growing awareness of this disease state and recognize our strong position among the top 10 DMEs, which has led to preferred placement and growth. This market remains highly attractive, with many patients in need of services.

And there are no further questions. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.