Ladies and gentlemen, thank you for standing by, and welcome to Tandem's First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, EVP and Chief Administrative Officer, Susan Morrison. Madam, please go ahead.

Thank you, and welcome everyone to Tandem's First Quarter 2020 Earnings Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development timelines and financial performance and operating plans, and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the risk factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements whether as a result of new information, future events or other factors. In addition, today's discussion will include references to adjusted EBITDA, which is a non-GAAP financial measure. Adjusted EBITDA is a key measure used by us to evaluate operating performance, generate future operating plans, and make strategic decisions for the allocation of capital. Please refer to our press release issued earlier today for further information. Today's call participants include John Sheridan, President and Chief Executive Officer; Brian Hansen, Executive Vice President and Chief Commercial Officer; and Leigh Vosseller, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll open up the call for questions. Thank you in advance for limiting yourself to asking two questions before getting back into the queue. With that, I'll now turn the call over to John.

Thank you, Susan, and welcome everyone to today's call. It's hard to believe how much the world has changed in just the past two months, since we held our last earnings call. First, we'd like to thank all of the health care providers we work with, who are finding creative solutions and ways to support people living with diabetes during these challenging times. In addition, to all frontline workers who are working tirelessly to take care of people affected by COVID-19 and who are helping to keep us safe and our families well. I'd like to express our sincere appreciation. Thank you. Thank you also to our suppliers, who have continued to support us during these challenging times without disruption. And finally, a special thank you to our employees, who in the face of the current pandemic have demonstrated incredible flexibility and adaptability to prioritize the well-being of the diabetes community. I'm very proud of what we achieved in this first quarter and the modern features of our products, systems and services are providing even greater benefit in this environment. Our strength in the first quarter can largely be attributed to the power of Control-IQ, which is bringing an unprecedented benefit to our customers' lives. As we look more recently, the demand for Control-IQ is offsetting some of the inherent sales pressures from COVID-19. It's a stark reminder that diabetes management is different than an elective procedure. As a result, many people are continuing to invest in their health during a time when it is more important than ever. What you will hear on today's call is that these challenging times have only strengthened our conviction that we have the products, the people and the drive to continue delivering high-growth to achieve our longer-term goals that we have set for our company. With this conviction for the long-term and with COVID-19 top of mind, we thought it would be helpful to focus our prepared remarks on how our business is operating during this pandemic to give you a better perspective on the challenges we face in the near-term and how we are overcoming them. First, I'm going to talk about our employee base overall, then discuss our manufacturing operations specifically, and Brian will provide some perspective on what we are experiencing in the field and internationally. Then, I'll touch on the pipeline before handing the call over to Leigh. Overall, I have never been more proud of our employees than in these past few weeks. As the concerns regarding COVID-19 increased throughout March, we were ramping up our precautionary measures, which started with the option to work from home for all employees whose positions allowed it at our headquarters in San Diego and our smaller facilities in Boise and Toronto. When California issued their stay in place restriction in March, our employees who were able were successfully set up to work from home. It was a tremendous effort by our Information Technologies team. Our ability to transition so quickly can largely be attributed to the scalability efforts we kicked off last year, and our investments in technologies that support remote operations. Departments throughout our company have risen to the occasion. They identified creative solutions and are staying motivated, true to our mission to improve the lives of people living with diabetes. Our customer service and technical support teams are all outfitted with laptops and are working from home, and we have the systems and infrastructure in place to support doing so in a compliant and efficient manner. As a result, we've been able to provide a high level of service to our customers during this time, be it help with troubleshooting, insurance verification for purchasing a new pump, or simply ordering supplies. Overall, it's been business as usual and we haven't missed a beat operationally even though we are working in an unusual way during very unsettling times. We have been deemed an essential health care business based on the critical nature of the products we offer and the community we serve. As an essential business, our manufacturing operations and warehouse teams have diligently continued to come to the facility to perform their jobs. They realize the importance of the roles in ensuring that we are able to continue to provide pumps and supplies to people with diabetes and as a result, we are meeting all of our production goals. We have taken extra cautionary measures to help keep these employees safe and are grateful for their dedication. Our supply chain has been another area of significant focus since early in this pandemic. Our procurement team has regular communications with our component suppliers and we have not experienced nor do we anticipate any shortage in components needed to manufacture our pumps or cartridges over the next several months. Also, our pump inventory as well as the available manufacturing capacity meets or exceeds our target levels and positions us well against unforeseen disruption in the near future. As Leigh will discuss further, we observed customers purchasing cartridges and infusion sets at a higher rate than anticipated at the end of the first quarter. As a result, our inventory for finished cartridges and infusion sets is below our targeted levels. Our third-party cartridge manufacturer recently commenced commercial scale manufacturing to supplement our existing parts manufacturing capacity and we will be steadily scaling volumes across this year. In addition, our primary infusion set manufacturer is currently working through inventory constraints and so we are carefully managing our pump supplies inventory while we work to overcome these temporary challenges. I'd now like to turn the call over to Brian to provide perspective on what our commercial team and our partners are experiencing in the field. Brian?

Thanks, John. It's been incredible to see our employees work so closely with the diabetes community as we navigate this pandemic together. The commercial organization is always the face of the company to our customers and health care providers and I'm very proud of how they represented themselves and Tandem during these challenging times. At the start of the quarter, our focus was on training more than 7,000 U.S. health care providers on our Control-IQ technology. It received high marks for being easy to learn and easy to teach. Then in late January, we commenced new pump shipments with Control-IQ and also began offering it as a no-cost software update to our in-warranty t:slim X2 users. Today, more than 30,000 people have updated their t:slim X2 to Control-IQ technology and the feedback from customers continues to support why it's so often referred to as life changing. As we look at the last portion of the quarter, COVID-19 began to significantly impact people's daily lives. This is where I will be focusing the majority of my comments to try and help provide perspective on what our sales and clinical teams have been experiencing over the last few months. At the beginning of March, our employees reported little disruption due to COVID-19. And throughout the month things began to change daily as the virus spread nationwide with increasing restrictions in many of our health care provider offices. Some representatives were asked not to visit if they were not feeling well or had been traveling internationally and others were restricted to meeting only specific clinicians or office staff. Throughout March, we at Tandem also increased the restrictions for our employees. As we closed out the quarter more and more practices were limiting in-person patient visits to emergencies only and moving to telehealth for continuity of care appointments. Keeping the health and safety of our employees and the diabetes community at the forefront, all in-person field-based activities were suspended. Our field team was able to quickly pivot to an all-virtual sales and clinical model leveraging our existing technology making the transition quite seamless. In states where there aren't restrictions, a few clinicians have reported that they're still seeing patients in person a day or two a week, but the vast majority are conducting appointments through telehealth while some have just delayed the visit to a later time. In this transition to telehealth, our team really shined in using technology to virtually support both customers and health care providers. Many clinicians turned to us to help them optimize the use of our tools to support their telehealth practices and the trust they place in us is something we do not take lightly. A key part of our virtual solution is our t:connect data management application. The cloud-based system allows a patient to upload their pump information and allow access to their health care provider. This provides our customers' clinician with critical information such as their patients' blood glucose trends, pump and CGM information all in one place which helps them better manage their therapy. As we've moved to a virtual world it's really highlighted where the ease of use of our t:slim X2 and automated insulin delivery technologies stand out. We are now offering all new customers remote training options including people who are new to pump therapy. We began dedicated efforts to create a virtual pump training program a few years ago and so have had time to develop and refine it. Patients who have trained remotely report high levels of satisfaction with their training and importantly we have not seen an increase in call volume to our customer services groups from these customers. As you saw in our results, pump sales in the first quarter were strong. It's important to remind you that in our domestic sales cycle, a person typically starts the insurance verification process about 30 days before making a purchase decision. So our pump shipments in March were largely initiated in February. What is encouraging is that in addition to our shipments being strong, demand has continued through April and it's natural to think that would have been even greater absent COVID-19. What about Control-IQ's benefits spreading. And similar to Basal-IQ, where we saw momentum build over multiple quarters, we expect Control-IQ to do the same. It's not uncommon for a person with diabetes to give consideration of pump therapy for a period of weeks or months following a quarterly visit with their clinician and they often take time to do their own research before making a decision. This is likely why we will continue to see people purchasing the t:slim X2 even though much of the country has shut down. That being said, depending on the depth and duration of this pandemic, we anticipate that we will begin to experience a greater slowdown in customer orders until people start to resume their normal daily activities. In the first quarter we continued to see approximately half of our new customers adopt pump therapy from multiple daily injections and the remainder coming from competitive conversions. The high rate of conversions is notable, as the percentage of former Animas customers has declined, as anticipated from an average of 18% in the first three quarters of last year to less than 5% of new customer shipments this quarter. These trends have also been consistent throughout April, which is interesting, because there is a natural assumption that people using multiple daily injections may be less likely to start pump therapy in this environment. We're also cognizant that a global economic recession can cause people to limit their spending. However, when someone purchases Basal-IQ or Control-IQ, they are making an investment in their health, particularly when you consider the potential for a reduction in hospitalization and other complications that can be very costly. Overall, healthcare is an area that people tend to prioritize, particularly at this time. And so, we could see things like greater utilization of flexible spending accounts and high deductible accounts, which could contribute to greater seasonality in the year. As a reminder, people with diabetes typically pay about 20% of their co-pay out of pocket. We've offered payment plans, as have our distributors, for quite some time, to allow customers to pay month-to-month, but it's actually a program that is rarely utilized. We will continue monitoring to see if usage increases in the current environment and are offering accommodations for people in their payment plans. We will always look at creative options for our customers, if this upfront payment is burdensome. Our customer renewals are also continuing to be a more meaningful part of our domestic business and we've increased our internal resources focused on this effort. We saw increased momentum in the first quarter, growing more than 80% year-over-year to approximately 2,200 renewal pump shipments and I'm pleased with the progress we are making. While the majority of our sales take place in the United States, we believe the effect of COVID-19 will have a greater proportional impact on our international markets. This is mainly due to the difference in the diabetes care model outside the United States in that patients are more often seen through the hospital systems versus a stand-alone endocrinology clinic and those hospital systems are currently focused on taking care of the critically ill. We remain in close contact with our international distributors who are responsible for all selling and customer support activities to monitor the impact of COVID-19 on them during these times. They are still open, servicing customers and taking care of business and we remain confident that post COVID-19 our international sales will continue to be a meaningful driver for our company. The new regions we are entering this year, Germany, France and Benelux, have been ramping up in preparation for launch. Our training for our distribution partners in these regions was completed before COVID-19 began picking up and travel restrictions were in place. Their initial orders were placed at the end of the quarter and their launch to customers will be dependent on the state of the pandemic in each country. We are hearing the same overwhelming positive feedback on Basal-IQ outside the United States that we heard historically here in the U.S., similarly we are hearing great feedback on the Tandem Device Updater, which was launched outside the United States to existing t:slim X2 customers beginning in the latter part of 2019. We are thrilled to bring the benefits of our technology to more people with diabetes worldwide and still expect to begin rolling out Control-IQ later this year. Overall, I'm very confident that the products we offer are continuing to change the standard of care in insulin pump therapy. Our team has done an amazing job meeting the demands of our patients and our partners during this pandemic and we believe any slowdown relating to COVID-19 will be short-lived in hopes that we will see a continued flattening of the curve and that people can safely resume their day-to-day activities. Until then, our teams remain busy and we are here for the diabetes community.

Thank you, Brian. As excited as we are about our current products, we're also continuing our new product development efforts. While being mindful of the FDA's public communication in mid-March that they are understandably prioritizing COVID-19 related devices. Like most of us, the FDA reviewers are also working from home, so we expect that review times may be longer than usual. We are fortunate that a clinical trial for Control-IQ for pediatrics was completed earlier this year. During the first quarter, the data from the study in children aged six to 13 was included in the submission to the FDA to lower the age indication for Control-IQ. There's always inherent uncertainty with any FDA submission. But during these unprecedented times, it's even more difficult to predict the timing of any approval process. In the meantime, we will continue to prepare for an expanded age indication pending the FDA's review. We are not actively in the clinical trial phase for any of our other products in development. However, we had planned a significant amount of human factors testing in the second quarter for both the t:slim X2 mobile bolus feature and for t:Sport, our smaller pump that is controlled entirely through a mobile app. These studies are typically performed in multiple geographies with diverse demographics. Due to the current COVID-19 environment, we have delayed commencing the testing for both of these future products. As a result, since the data is required for our regulatory filings, the target submission timing for both mobile bolus and t:Sport will be pushed out until it's safe to travel again and the protective government restrictions are lifted. That being said, we remain very excited about both products. Our mobile application with Remote Bolus capability for the t:slim X2 is one of the most highly requested features by our customers. It's built based on the new mobile app platform that is the foundation of our digital health strategy. The first generation of this app had a beta launch in the first quarter and will be rolled out more broadly in the upcoming weeks. This app will benefit patients by allowing our t:slim X2 to wirelessly upload data from their pump and CGM to our cloud-based t:connect data management application, a feature that will provide even greater benefit in this current environment, but is also significant as it takes away a burdensome step for our customers and their healthcare providers of having to upload data through the USB cable to see tracking and trending information in t:connect. As we've shared in the past, clinicians often tell us that they spend meaningful office time accessing data from different insulin pumps each day. With the launch of this new app, we will be offering the first wireless phone-based solution to address this issue and thereby improving office efficiency by streamlining visits, and providing important resources for telehealth initiatives. Now, I'd like to turn the call over to Leigh to discuss our financial results as well as the financial guidance. Leigh?

Thank you, John, and good afternoon, everyone. Our entire organization has executed remarkably well managing through the challenges presented by these uncertain times. Focusing on our performance in Q1, we are proud of our achievements, particularly the successful launch of Control-IQ and the incredible feedback we continue to receive on its performance. The impact of COVID-19 would likely be much greater on our business without its availability. And as a result, we are not seeing the same level of negative impact as in other health care sectors. Our first quarter results were only modestly impacted by COVID-19, as Brian discussed. We began the year with $98 million in worldwide sales this quarter, which is our second highest ever, behind only our most recent fourth quarter. Our success is a direct result of the growing demand for t:slim X2 and all of the benefits it offers. We shipped 17,400 pumps in the first quarter versus 14,700 a year ago. Our first quarter sales included $18 million from international geographies. Our domestic pump shipments of 13,200 increased 36% year-over-year, delivering $80 million in sales for the quarter. We were able to achieve this growth on the strength of Control-IQ even with the outsized Animas benefit in the first quarter of 2019. In total, domestic pump sales were $50 million with the remainder from pump supplies. As John mentioned, we observed some customers purchasing cartridges and infusion sets more frequently than the routine quarterly cycle, potentially stocking up on supplies. We estimate that this resulted in an acceleration of sales from the second quarter of approximately $3 million. We shipped 4,200 pumps to markets outside the U.S., including our initial orders to Germany and France late in the first quarter. This was our highest international pump shipment quarter since the Animas opportunity ended, which was mostly complete in the second quarter of 2019. The 5,100 pumps shipped in the first quarter of 2019 benefited in large part from Animas conversions as well as the beginning of the turnaround from a backlog in 2018. Therefore, there is no meaningful business comparison to be made against our 2019 first quarter international results. Our worldwide warranty installed base grew to approximately 155,000 customers, which drove a greater than 90% year-over-year increase in supply sales. This breaks down to approximately 127,000 people in the U.S. and 28,000 people outside the U.S. As a result pump sales represented 61% of total sales followed by infusion sets at 27% and cartridges at 12%. We have begun to experience and expect to continue to see downward pressure on our sales in the face of this COVID-19 crisis as healthcare providers and patients work through the disruption to their typical interactions and some patients choose to delay their purchasing decisions due to financial uncertainty. As we discussed, what is encouraging is the extraordinary feedback we have received on Control-IQ, which we believe helps mitigate a slowdown in sales. It is difficult to estimate with any degree of certainty the depth and duration of COVID-19's impact on our business. Therefore, at this time, we are withdrawing our 2020 annual guidance and will instead provide color for the near term based on the best information we have available today. As Brian mentioned, the dynamics are anticipated to vary greatly between the U.S. and the rest of the world. In the U.S. it is not only typical for our pump to scale seasonally across the quarters and a calendar year as people begin to meet their insurance deductibles, but also across the weeks and months within the quarters. Accordingly, March was our highest month of sales in Q1. We expect to achieve at least $75 million in domestic sales in the second quarter, which implies at least 7% growth compared to the second quarter of last year. We are not assuming the same seasonal progression across the weeks in the second quarter or even the third quarter until we see signs of a recovery. Despite the excitement for Basal-IQ outside the U.S., we expect that the international markets will experience a greater impact because their patients tend to be treated more commonly in the hospital setting. In the second quarter of 2020, we anticipate at least $10 million in international sales, primarily driven by pump supply for our existing installed base. Keep in mind that the second quarter was already lined up to be a difficult comparison for our international sales based on the same factors that influenced our first quarter results for last year. In summary we anticipate our worldwide sales in the second quarter to be at least $85 million. Although we have withdrawn our annual guidance and obviously have no visibility to what COVID-19 recovery curve will look like, we have not completely dismissed the possibility of a scenario that could result in achieving our original guidance range as more and more people experience the benefits of Control-IQ. Wrapping up our first quarter performance, gross margin was 51% this quarter, consistent with the prior year. We saw an improvement in each of the individual product margins compared to the first quarter of 2019 based on higher volumes and progress on the initiatives that will drive us to our long-term gross margin goal of greater than 60%. This benefit was partially offset by the impact of product mix with pumps representing 61% of worldwide sales in the first quarter of 2020 versus 70% in 2019. We also recognized royalty expense in conjunction with the launch of Control-IQ in January both for new pumps shipped as well as the software updates that occurred within the quarter. The resulting royalty cost was approximately 1% of total sales this quarter. Non-cash stock-based compensation was equivalent year-over-year at approximately 2% of sales. We demonstrated leverage in our operating expenses as reflected in improvement to adjusted EBITDA which excludes the impact of non-cash stock comp. The adjusted EBITDA margin increased to 4% of sales in the first quarter up from essentially breakeven in the prior year. We have now reached six straight quarters of positive adjusted EBITDA. Operating expenses grew to $64 million in the first quarter including $14 million in non-cash stock comp as we continue to drive programs to support our long-term market leadership, customer support and profitability objectives. This compared to operating expenses of $44 million in the prior year including only $9 million in stock compensation. The non-cash stock comp charges are expected to start declining in the second half of 2020 from these higher levels we have seen in the last few years. We ended the first quarter with $160 million in total cash and investments which is a $16 million decrease from the end of the year. This decline was anticipated in part due to typical first quarter seasonality where we experienced lower pump sale levels associated with the timing of customer insurance deductible resets. The decrease was magnified by other planned investments. These include capital expenditures for manufacturing capacity and facilities expansion, building up inventory to meet safety stock levels for protection against supply chain disruption and the payout of annual incentive compensation awards. This spending was partially offset by proceeds from employee stock option exercises of $11 million. Even in light of uncertainties due to COVID-19 we are focused on making prudent and thoughtful investments in the organization to continue to drive growth and ensure achievement of our long-term sales and profitability initiatives. These activities include continued recruitment of key employees, advancement of the R&D pipeline and implementation of advanced technology solutions all of which may result in an additional decrease in cash in the near term. We will continue to evaluate our planned uses of cash in the coming months as new information becomes available and make changes as considered necessary. Considering our near-term outlook for Q2 2020 sales and our intention to continue making key investments, we expect gross margin to be relatively flat in Q2 compared to Q1 with modest pressure on adjusted EBITDA margins. We remain committed to achieving our long-term margin objectives. With that I will turn it over to the operator for questions.

Operator, are there any questions on the line? We apologize on behalf of the system because it looks as though there's some sort of technical difficulty happening and the operator isn't able to connect to be able to ask questions. So maybe we'll give it a minute more in case they're able to resolve this issue. If not then we'll change over and apologize but happy to do any questions or things in follow-up or if people would like to e-mail me directly, our analysts you have my e-mail address. This is Susan Morrison. If you want to send it to me, I'm happy to actually just facilitate these amongst us and the management team now. We'll wait for a minute.

Thank you for your patience. Our first question comes from the line of Chris Pasquale of Guggenheim. Your line is open.

Thanks. Can you hear me okay?

We can.

Okay. Perfect. I was hoping to start off with if you could give us just a little bit more color on the assumptions behind the $85 million number for 2Q. What are you assuming in terms of the pressure on new patient starts? And then how have you thought about how that progresses relative to what you saw in April?

Thanks for the question Chris. The Q2 guidance is really based on what we've already seen through right now. So as you can imagine we already know what April looks like. And we have orders in the system that will dictate pretty much how May will come in. The biggest question mark right now is what happens in June and as we progress forward. At this point we haven't anticipated a typical seasonal scale, which would mean that June would normally be the highest month of the quarter. So we're just going to keep monitoring that. But at this point based on what we already know today and about our international orders that we have in hand, we're very confident that we can hit at least $85 million. Interestingly our metrics that we typically monitor, the number of people that are coming from MDI versus competitor conversions, those have all stayed intact now through April even though we're seeing some pressure on orders overall.

Okay. That's helpful. And then just for this quarter I want to understand — thank you for the impact of the supply stocking. Was there actually a revenue contribution from the new European territories this quarter? Was there stocking that went into the OUS number here in 1Q?

Yes. We haven't quantified that but we did have our initial stocking orders for Germany and France in particular which contributed to the international sales this quarter.

Okay. Thanks.

Our next question comes from Travis Steed of Bank of America. Your line is open.

Safe and well. Thanks for taking the questions. Just on the $85 million in Q2, how much below that would your original plan be? Just kind of think through kind of what scenarios have to happen in the back half in order to get to your original expectations?

Sure. As you think about how to look at the entire year, we obviously don't give any of our detailed modeling assumptions, but it really comes down to what sort of recovery curve one might anticipate. And you hear lots of conversations about a V shape, a U shape, even a W shape. At this point our only visibility is what we have in front of us right here for the upcoming month or so. And so we're not factoring in as we go into Q2 even thinking about Q3 any sort of seasonal uptick that we would ordinarily see.

Okay. And then I know you're suspending guidance for this year. Are you still reiterating the five-year plan of 500,000 patients? And then also I know you built in some conservatism originally for competitive launches, but you got fortunate and had your product approved and your competitors haven't yet. So it seems like there's a chance that those could get delayed. Just trying to think through what kind of incremental opportunity there could be on the margin from competitive launches getting delayed?

Travis, I would just say that we have not changed our intention to pursue the numbers that are part of our five-year plan. And I think that we have to wait and see what happens with the competitors obviously on their own specific clinical studies and plans. But at this point in time I think it just gives us runway. We had anticipated about six months to a year of runway to build momentum on Control-IQ. We think that's still the case.

Our next question comes from Alex Nowak of Craig-Hallum. Your line is open.

Great. Good afternoon everyone. This is actually Will Fafinski on for Alex here. Thanks for taking the question. Just to start, John how are you guys positioning the sales force to sell in a post-COVID world where it might be harder for reps to access these medical clinics?

Well, I'll just say that our team did a great job transitioning to virtual interactions with our physicians. We have excellent relationships with our physicians. We're in touch with them frequently both our sales organization and our trainers. So the transition was smooth. They did a great job. I'll let Brian add a little color to that.

Yes, John, I think we're going to take their lead. We're going to see and do what they would like us to interface with them. Thankfully we had many of these tools in place both for the virtual training and also clearly everyone has the tools in place for e-mails and calls and video conferencing now with the physicians. So we've even done some really unique sales calls via a virtual setting now. And we'll see how that all plays out. I think it's going to vary account by account and we'll kind of follow their lead and take it a day at a time. But so far we've been in direct conversations and communication with all of our accounts and they're adjusting to the new norm as well.

No. That's great to hear. And then second question is just stepping into the patient's shoes a little bit what is the end user, people with diabetes, saying about COVID and their willingness to switch devices during a time when it might be tough for them to access the doctor or hospital? Is this turning patients off from upgrading at all? And what would that do to the end-user demand through the end of the year? Thanks.

I think we can only speak through Q1 and in April what we've seen so far. In the calls into our team and our communications with our field team has been very robust. You might actually look at this a little bit that people have time at home. They're doing their research. They are communicating still through telehealth with their physician. And then they're reaching out to us with that time to have the conversations with our inside and external sales teams. We've actually found them to be very accessible right now and very open to those conversations. So unlike the face-to-face visits we may have had before, our virtual sales calls have gone very well and we're actually finding a very captive audience right now. So again we're adjusting to the new norm. We only know what we know four months into the year. But so far it's gone very well and patients have been very open as you can tell from our NPS numbers to switching therapies and coming onto a pump so far.

I'll also add that the stress levels that come along with just dealing in an environment with COVID-19 affect people's blood sugar control, as well as COVID-19 itself has been shown to actually cause significant issues with hyperglycemia and blood sugar control. So we're hearing that people are actually appreciating the benefit of Control-IQ, because it does have such improvements in their overall control. And we expect that to continue to drive demand to the device.

Sounds good to hear. Thanks, everyone and best of luck moving forward.

Thank you.

Our next question comes from Brooks O'Neil of Lake Street Capital.

Thank you. Good afternoon and congratulations on continuing progress guys. So my first question is, do you see any indication of a building backlog? I understand the normal seasonal patterns and I understand that. The comments you made about not assuming any buildup. But do you see any indication that the patients have delayed purchasing pumps but that when normal life resumes there might be a big jump in demand for the product?

Brooks, first of all I would say that without COVID-19, we would have done better in the first quarter. And as Brian indicated, we anticipated weakness in March and April as people converted to virtual visits and virtual training. And we were surprised, obviously very pleased to see the strength in those two months and it's largely driven by Control-IQ. It's interesting because right now it's approximately three months from the time we started to actually ship Control-IQ back in January. And when we look at what happened with Basal-IQ, after the first three months people started to talk to their physicians, they began to actually see the benefit of Basal-IQ. The same thing is happening now with Control-IQ. So Brian mentioned growing momentum. We expect to see continued growing momentum for Control-IQ. And as people express the great results they're seeing to their physicians, that's only going to underscore the value of the product. So I think that we do anticipate that there will be a bump when we get through this. And we're well prepared to deal with that.

Yes. Great. I understand in general what overwhelmingly positive customer feedback means. But can you give us just a little color on some of the sort of anecdotal things or whether really the elevated time in range is really resonating with your patients?

Sure. The first thing I'll say is that it's our customers who are calling Control-IQ life changing. It's not us. They're doing that. And if you look at the blogs, if you look at the e-mails that we received, the time in range people are experiencing now is in the high 80s and 90s. It's just absolutely incredible. People love the fact that they can go to sleep and they don't have to worry about their diabetes while they're sleeping. And they have just amazing experiences at night. They are able to sleep through the night, which is really positive. So everything that we're seeing right now is strong, it's great. It's easy to use. It integrates with the Dexcom G6, which doesn't require fingersticks. And it's also minimal alarms. So it's all been very, very positive.

Great. Thank you very much.

Our next question comes from Ryan Blicker of Cowen. Your line is open.

Hi. Thanks for taking my questions. Maybe starting with two quick pipeline ones. For the remote bolus feature, can you remind me what other clinical work was required besides human factor testing prior to submitting? I don't believe you needed a clinical trial? I just wanted to confirm that. And then also for the next-generation algorithm you were planning to launch in 2021 with some really attractive features. Could you give us an update on what type of clinical trial work you think might be required to launch that product? And should we expect that to launch a little bit later given what's happening in the world? Or do you still think without any incremental surprises that could launch in 2021?

Yes for the mobile bolus feature, there is no additional clinical studies required. It's all about human factors. And human factors is very different than a clinical trial. There's definitely work. There's a lot of work that goes into planning it. The actual human factors testing takes a day or two and then there's time that's required to analyze the results and prepare the reports. So I'm not trying to understate the challenge of the complexity of doing all that but it's really much more contained and it happens in a much shorter period of time than a clinical study. So we think there's almost a one-for-one impact of the delays between the time we had planned on doing the human factor studies and the time that we'll actually get it done for the submission. We are currently still working aggressively on Control-IQ next generations. We are actually looking at it in a risk-based manner. So the first improvements we're looking at in Control-IQ really are not going to require a great deal of clinical work. And so that's what we're prioritizing now. There's obviously going to be clinical work that's required and we're going to likely start that work later this year. And it's difficult to say if COVID-19 is going to impact that at all right now. But it will start off with a series of small studies just to confirm the safety and confirm the impact of those changes with a pivotal study sometime in the 2021 timeframe.

Got it. Very helpful. And then can you provide any update on your conversations with major payers over the last month and any change since this has emerged. Has COVID-19 stalled any progress you may have been making with UnitedHealthcare? Thank you.

We don't comment specifically on any of our payer interactions and activities. As we've talked about in the past our priorities really are to get as many agreements in place as possible, and then work with our payers to get additional reimbursement for some of our complex features that are definitely benefiting our patient population and also looking to streamline the process of onboarding our patients. So there's a lot of activity going on in that direction. The Control-IQ pivotal data and the initial market impact has been very positively received. We're working with all the payor organizations right now and we're seeing great progress. But it takes time to do this. And I think that we'll see these things happen over time.

Our next question comes from Matthew Blackman of Stifel. Your line is open.

Hi. Good afternoon, everybody. Thanks for the questions. I've got a couple for Leigh. So we — I'm curious about what you're seeing in April and I don't expect that you'll tell us the magnitude of the headwinds, but can you at least say that those headwinds have stabilized or bottomed?

Hey, Matt, thanks for the question. I don't think I could predict whether they've stabilized or bottomed at this point. All I can say is that April and May are seeing pressure compared to what we would ordinarily see, which is why the guide is sequentially down at this point. But really in our mind as we said that June is the big question mark of how it proceeds from there. So that's where we are at this moment.

Okay. Fair enough. And I guess my follow-up question. Help us think through what metrics you guys are looking at to try to project the potential recovery trajectory? Obviously, you have order numbers but how are you thinking about the importance and impact of more macro indicators like consumer confidence or unemployment? Just help us understand how you guys are thinking about all of those cross currents? Thank you.

Sure. Beyond Q2 anyone's guess is as good as mine about what happens. But you're right it's really the macro factors that we would have to consider more that would be driving impact to the business. So for instance, as states come out of this how do they phase it out, how and when are social distancing requirements relaxed? When are state stay-at-home rules relieved? And how quickly those things return to a more normalized environment. We believe that will happen in stages or phases over time. It won't be a quick turnaround which is why at this point we withdrew the annual guidance because no one can really guess how that's going to play out. We do see ourselves positioned very well now.

All right. Thank you, Leigh.

Our next question comes from Matthew O'Brien of Piper Sandler. Your line is open.

Thanks so much. Good afternoon. Thank you for taking the questions. Just for starters, Leigh thinking about your comment and I know you're not reiterating full year guidance or not but you're saying it's not off the table either. Given what you've done in Q1 and your expectations for Q2 the back half ramp would be pretty significant to get there. So clearly as you're rolling out Control-IQ, you're seeing extremely strong demand for that technology. So can you just talk a little bit about what you are seeing to give you the confidence to say you potentially could hit that guidance given the big ramp in the back half of the year?

I'm not even necessarily saying there's no upside or downside to that. It's just a possibility. If you look at the variety of scenarios that could occur, you have the macro factors, which we can't control. What we are very enthusiastic about is the role of Control-IQ in this. We couldn't have launched at a better time. With the experience people are having and the success we're having with this transition to a virtual environment, we feel like that will help us through this. But again, anyone's guess is as good as mine about how this plays out in the overall market.

Okay. And then the follow-up question I guess there is kind of two in one, but the gross margin in the quarter was a little bit lighter than I would have expected just given all the upfront revenue that you generated plus the bigger disposable component as well. I think a big chunk of that was OUS if my model is right. But why wasn't gross margin a little bit better? And then those payment plans that you guys keep talking about that you have available. How are you factoring that into the business maybe later this year as we come out of the recovery?

From a gross margin perspective we were flat when you look at this year versus last year. And there are a couple of factors that really play into the gross margin. One is product mix itself. And so the percent of pump sales we saw in Q1 this year versus Q1 of last year was lower for pumps which is the biggest driver of our gross margin. Also add to that that it's the first time we have a royalty component associated with Control-IQ, which was about one margin point. So really there are a number of factors playing into that. We did see improvement across all product margins though this quarter versus last year. So we're still very excited about the progress that we've made and where we expect margins to go, still believing that we will be 60% or better in our long-term models. When it comes to payment plans that's something that it's hard to say. We've had payment plans out there pretty much since the beginning of our business, our distributors offer them as well. We've really seen a very small percentage of people that take advantage of them. But we'll continue to evaluate them and see if there are ways where we can enhance them particularly in this environment where maybe we can help people who might be struggling and need some more financial assistance. So at this point, I wouldn't anticipate any trajectory change because of payment plans, but we are always listening to the customer voice and seeing what we can do to help.

Very helpful. Thank you.

Our next question comes from Matt Taylor of UBS. Your line is open.

Hi, thanks for taking the question. I wanted to focus on telehealth a little bit. You talked a lot about your capabilities, which I would say are relatively advanced for a medtech company. It seems like you're having some success. So I just wanted you to talk about your experience with that in the U.S. and parlay that into a question about outside the U.S., because you said OUS would be more impacted by this disruption because those folks are usually seen in hospital. So I guess you're not seeing as much use of telehealth there? Or why can't they pivot like you appear to have done in the U.S.?

I'll start with the U.S. first. We are fortunate to have done several remote trainings back in late 2018 and 2019. So we had already done many and got pretty good at it. We have a cadence of homework we send out for the virtual training, some follow-up, a survey and then some additional things that we do to help that patient along. So we got pretty good at it and we were able to pivot pretty quickly. What I didn't see happening as much is the virtual meetings with the physicians and the certified diabetes educators in our accounts. They've embraced that and we're all learning together and it really develops a unique bond that I think will last for a while. The trainings have been very well received. While it's not for every patient we work with the health care provider on those patients who can't be trained remotely to find an alternative before we can get face-to-face. It's gone surprisingly well and I'm super proud of my team and how they've reacted to this. I do think it will be somewhat of a new norm going forward and a bit of a silver lining to the entire U.S. health care system. For Europe, we are helping train our distributors on some of the best practices we've seen here. But in that hospital setting those patients just aren't seen as much because those hospitals have really limited access and shifted to acute care addressing the pandemic. So there's just a bit of a different dynamic, but that's not the same for all of them. It varies by region and by country. We are still seeing sales internationally and solid sales here at home. I think this telehealth piece is a good silver lining of the process we're going through.

It really underscores the importance of our investments in our mobile health initiatives. We're well-positioned now to really improve the experience for both people using the pumps and the physicians in this new virtual world. The mobile app is our first foray to this. As a company, we're building a robust ecosystem of data driven products and services that form around the pump to increase communications, guidance and access to data to help both the people using the pump as well as the physicians make better decisions and manage diabetes more effectively.

Maybe just one follow-up. You mentioned that you're seeing reports of people achieving very high time in range. I'd love if you could talk about that given there was some discussion about the mid-70s number from the trial. Maybe talk about why you think that's playing out so well in the real world?

When you look at the trial, the trial was very representative of the state of diabetes in the United States where there were people who had very good control and then people who just didn't try to control their diabetes. In many cases there was no bolus done during the trial in a significant percentage of people that had high A1cs. So they typically brought the time in range down for the overall population. But I think now if you look at the people who are using the pump, they are serious about managing their diabetes and they care about it. When you look at that population we've seen many reports of people who have had great experiences and they're seeing very high time in range. It's great to see and it's something we anticipated. We're working on looking at post-market data right now and planning to collect it and present it as we have the opportunity at shows and conferences in the future.

Our next question comes from Steven Lichtman of Oppenheimer. Your line is open.

Thank you. Hi guys. I guess first I wonder, if you could talk a little bit more about how the remote training works. Is this something where you've trained the offices on how to do that remote training and they take it from there? And do all your customer offices have that capability? And then Brian, you talked about alternatives for those that remote training doesn't work for, can you expand on what some of those are?

Some of our accounts have been utilizing remote training and they have been trained by us via Microsoft Teams, Zoom or similar platforms. They are training their patients remotely and their educators are doing that sometimes with our help but many on their own which is great for us because our team schedules multiple trainings a day with patients directly. There's prework for virtual training, typically done through Microsoft Teams or Zoom. After the training there's follow-up, a call and a video or two. We have a lot of online resources and those resources have really helped us during this time and allowed us to pivot quickly. If a patient doesn't qualify for remote training for reasons like technology limitations, comfort or they're new to pump technology and prefer face-to-face, we've done remote trainings with the patient in the physician's office where the clinician helps facilitate while we join remotely. That has worked out well in those cases and we're getting good at this. We've done thousands now and it's working out incredibly well.

Yes, Steve we've done thousands of remote trainings just in the first quarter and we expect to see that number grow through the year.

Got it. Great. And then secondly another follow-up. Brian, you spoke about the upfront payment flexibility. Can you talk a bit more about what those programs look like? I mean you mentioned month-to-month is that the upfront amortized over the full four years? Is it over different periods of time? I mean just any more color on that would be helpful.

It varies. We're looking at delaying or spreading out payments for folks. Historically, we haven't spread payments over the full warranty of the pump. If there is a strong demand, one of our partners might offer that. As we hear more requests for help, whether it's pumps or supplies, we're open to working with patients to ensure they're not facing hardship. Historically, requests have been surprisingly low. We continue to monitor and are willing and able to be flexible with our patients.

Got it. Thanks guys.

Our next question comes from Joanne Wuensch of Citi. Your line is open.

Yes, hi. This is Matt Henriksson in for Joanne. First question is with regards to second quarter and your commentary on pressure on orders. Based on your anecdotal observations and channel checks, what's the bigger driver here? Is it delays from patients having to go through the telehealth setting? Or is it more delays given unemployment or other economic factors?

I actually think it's too early to tell. We certainly haven't felt pressures from unemployment or lack of insurance yet in the interactions we've had with our patients. But with that 30-day lag some of these discussions started beforehand and we haven't seen people necessarily fall out of a funnel due to that. We'll figure that out as we go forward and see if that starts to manifest itself differently. Right now it seems people are adjusting to this new environment.

I think a lot of it right now is people adjusting to this new environment. We need more time to determine which factors will have the biggest impact on our business.

Okay. That's helpful. And then second, as we look at your OpEx and spending, what levers do you have to pull in some of your more variable costs if you need to?

This year is a year of investment for us. It's about laying the foundation for long-term initiatives: advancing the pipeline, meeting our market leadership goals, investing in technologies to drive operating leverage. We still anticipate continuing those investments even though they don't directly drive this year's sales. That said, we could slow some of these investments if needed to conserve cash. We do need to continue hiring to support our growing installed base and invest in manufacturing capacity, but we're evaluating discretionary items and seeing what can be delayed to be prudent with spending.

That's helpful. Thank you very much.

Our next question comes from Ravi Misra of Berenberg Capital Markets. Your line is open.

Hi, thank you for taking the question. I hope everyone is doing okay. I want to return to the 2Q guidance and then this aspirational hope that the original 2020 guidance is not off the table. Can you help us think about how the Q2 U.S. number includes some people that you might have been working on in March and April that are coming in? Or give a little better color on the cadence of that? And then how do you expect those trends to continue into the second half of the year? Were we exiting Q1 with a large backlog and that's getting resolved in Q2? What trend are you seeing going towards the end of this quarter? And then I have one on just telehealth after that.

When it comes to trends beyond the current month or two there's really nothing I can give color to. I wouldn't necessarily say there was a backlog coming into the quarter. We're happy to see consistency in the ratios of people coming from MDI versus competitor conversions. If anything changes, we will continue to monitor. At this point I don't have clarity beyond this quarter and the next month or so.

Great. And then just around telehealth. Can you help say what steps it's actually helping with? Are you seeing more support in new patient onboarding? Or is it helping with existing patient management or new doctor training or making your sales force more efficient? Where do you see the strength right now? And is the infrastructure all built in-house or are you leveraging third-party video vendors? Thank you.

The core video and conferencing technologies we use are broadly available (Teams, Zoom, etc.), but the other pieces such as virtual training workflows, materials and follow-up surveys were developed in-house. We've been doing remote training for a while, so we were prepared. For physicians, we've provided training and best practices for telehealth and have been helping them with workflows so patients can be put into remote channels. The trainings have been well received and it's helped both new patient onboarding and ongoing management. The Tandem Device Updater and the mobile app further support this by easing data upload and reducing clinic burdens.

Ravi, I'd also say that the mobile app is important. We were on a call last week with about 150 endocrinologists around the world, and one shared that he had to bring on 10 additional people just to download pump information into his system over the last month so he could manage therapy. That was a huge burden. When the mobile app rolls out it will automatically upload data from the pump to the cloud and eliminate that burden on the health care practice. We see that as a big deal and as part of a set of digital health tools improving efficiency for providers and patients.

Operator can we go to the next question? There may be another delay in our bridge. I'm going to supplement with one that I received via e-mail. This question focuses on if we're doing more digital outreach to prospects who are stuck at home, is it working? That is, are we doing digital conversations to talk to them about the benefits of pump therapy?

Marketing in a pandemic is interesting. Our first messaging has been to existing patients to reassure them we're here and addressing supplies and technical support. We remain active on social media and have positive feedback on Control-IQ. If someone reaches out digitally expressing interest, we're ready to interact through inside sales and virtual training. Access to patients has been greater in the recent months and digital engagement has been effective, but we're focused first on serving our existing customers and not being opportunistic in this unique environment.

Jeff Johnson of Baird, your line is open.

Thank you. Good evening, guys. Two quick follow-ups here in the interest of time I'll ask them both. One, supplies in the U.S. were about 37% to 38% of revenues this quarter. But they had been 32% to 33% in the past few quarters. Should we expect in Q2 that they remain up in that upper 30s range? My gut is that people are still kind of hoarding supplies or trying to load up on supplies but would love to hear your answer there. And then if you do go to some payment plans maybe over two years, how would you recognize that revenue? Do you recognize it upfront or spread it out over the plan period?

Starting with the supply question, supply revenue is closely a function of our installed base and tends to be predictable. In Q1 we saw about $3 million of supply pull-forward associated with people stocking up, which we view as a pull-forward from Q2. Otherwise supplies tick up across the year with installed base growth. Regarding accounting for payment plans, if you can assess collectability upfront you book the revenue on day one based on your best estimate of collectability. We have some history with payment plans and make estimates accordingly, so in most cases the revenue would be recognized upfront subject to collectability assessment.

Thank you.

Our next question comes from Danielle Antalffy of SVB Leerink. Your line is open.

Hey, good afternoon. Thanks so much for taking the question. Sorry to belabor the telehealth point, but it sounds like you guys have been doing a pretty good job here with telehealth so far in Q1. I was curious when you think about Q2 where you have different revenue streams in the U.S.—patients switching from MDI, patients switching from competitive pumps and existing Tandem patients upgrading—could you give a little color on which subset is most at risk that we should be thinking about slowing significantly in Q2? And which subset would then recover on the back end of COVID?

Frankly, we were surprised as we came into April that we were still seeing roughly the same balance of patients coming from MDI and competitor conversions. If you had asked me a month ago I would have thought the MDI population would be more impacted because moving to pump therapy is a significant change and might be harder with remote training. But so far we haven't seen a deviation from our norm. It would only be speculation at this point to say which segment is most at risk.

Okay. Got it. Thank you. And then the other question on telehealth: as I'm doing some physician checks I'm hearing some clinicians caution around training pump-naive patients remotely. How do you get physicians comfortable with telehealth-based training for such patients?

It varies account-to-account. One way is to show physicians the method we use—there's rigor, prework, follow-up and survey. Our trainers are available to follow-up and our tech support is 24/7. If a physician is concerned, we show them exactly what we use with their patients and provide outcomes feedback. So far, it's not been a barrier and physicians are getting more comfortable with telehealth as they use it more frequently.

Got it. Thank you so much. Stay safe.

Our next question comes from Jayson Bedford of Raymond James. Your line is open.

Hey, this is Matt Wizman on for Jayson. Thanks for taking my questions. On telemedicine, what percent of your endocrinology base do you think has successfully moved to telemedicine at this stage? If you don't have that number, what inning do you think we're in that conversion? Would you expect this to be near 100% by the end of Q2? And if telemedicine becomes more permanent, are there any positive or negative long-term impacts we should think about?

I haven't seen published numbers on adoption rates. I would lean towards most accounts being at least partially using telehealth—north of 50%—and it's growing. Adoption varies by region and account. I think telehealth will remain an important part of care going forward, and it's a core capability for us. We'll refine it over time and incorporate it into our offerings.

All right, great. My second question: going into the Control-IQ launch, there was concern about the impact of deductible resets when launching in January vs. 4Q. Looking back at the launch through mid-March, do you think seasonality dynamics had any impact on the Control-IQ launch and any other learnings?

If anything was normal or traditional I'd say Q1 was moving in a traditional way, with seasonality patterns. January is typically the lowest month, scaling up into March. So I would say there was nothing different because of Control-IQ.

All right, great. Thanks for taking my questions.

Before I wrap up I wanted to share a piece of customer feedback I heard recently. During this COVID-19 pandemic, we've had customers who have been personally diagnosed and who have had family members who were diagnosed reach out to us and said that they were able to focus more of their attention on taking care of themselves and their loved ones because of Control-IQ. They were very thankful for that. That's why we're here. I'd like to thank the people who use our pump, their health care providers and particularly our employees. Thanks for everything. In the upcoming weeks we are planning to participate in a number of virtual conferences hosted by Bank of America Securities, Berenberg, UBS, Craig-Hallum and Raymond James. I hope everyone here is staying safe and well. Thanks for joining us today. We will all talk to you soon. Stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.