Good day and thank you for standing by. Welcome to Tandem Diabetes Care First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, Executive Vice President, Chief Administrative Officer. Please go ahead.

Hello, everyone, and welcome to Tandem's First Quarter Earnings Call for 2023. We'd like to remind everyone that today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, product development timelines, financial performance, and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is highlighted in our press release issued earlier today and under the Risk Factors portion and elsewhere in our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and in our other SEC filings. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or other factors. Today's discussion will also include references to a number of GAAP and non-GAAP financial measures. Non-GAAP financial measures are provided to give our investors information that we believe is indicative of our core operating performance and reflects our ongoing business operations. We believe these non-GAAP financial measures facilitate better comparisons of operating results across reporting periods. Any non-GAAP information presented should not be considered as a substitution independently or superior to results prepared in accordance with GAAP. Please refer to our earnings release, quarterly report on Form 10-Q, and the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Today's call participants include John Sheridan, our President and CEO; Brian Hansen, our Executive Vice President and Chief Commercial Officer; and Leigh Vosseller, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we'll open up the call for questions. Thank you in advance for limiting yourself to one question before getting back into the queue. John, you're welcome to begin.

Thanks, Susan, and thank you everyone for joining us on today's call. We're coming out of the first quarter with confidence about our ability to achieve our key operational and commercial goals we set for this year. We continue to expand the insulin pump market while capturing competitive share and growing the number of Tandem customers purchasing a t:slim once again. This is a meaningful achievement in a highly competitive environment and a testament to our talented employees and our number one rated t:slim X2 with Control-IQ technology. Internally, our teams continue to prepare for the launch of multiple new products in 2023. I'll talk more about each of these later in my comments. But overall, there's enthusiasm at Tandem as we approach being able to offer another wave of innovative products to the diabetes community. With these launches, we'll be building upon our reputation for offering high-quality products and services that reduce the burden of diabetes management. We set our high bar with our easy-to-use t:slim X2 with Control-IQ technology. It continues to deliver outstanding clinical and quality of life improvements across a wide range of ages and demographics of people living with Type 1 diabetes. This was recently highlighted in multiple publications, including the New England Journal of Medicine and Diabetes Technology and Therapeutics. The amount of positive data we are amassing for our market-leading AID capabilities is unrivaled. The New England Journal publication was the third time our t:slim was featured in the journal, this time focusing on the benefits of our Control-IQ technology for very young children. Diabetes Technology and Therapeutics recently published a meta-analysis of three randomized Control-IQ trials that demonstrated the immediate and sustained clinical benefit of our system. What this meta-analysis shows is that regardless of age, people with the highest baseline hemoglobin A1c and the lowest time in the range experienced the greatest benefit, which is important as we work to bring the benefits of our technology to more people living with diabetes. Our technology is not only making a positive clinical impact, but we are also making a positive impact on the environment. By choosing a t:slim pump, our customers have kept more than 20 million batteries out of landfills since 2012. This is an important part of our longer-term product strategy as we look forward to similar environmental benefits from our future product offerings. It is this kind of performance and impact, combined with the customer experience our teams provide, that sets Tandem apart and allows us to continue growing our installed base, three years following the launch of Control-IQ. I'd now like to ask Brian and Leigh to spend a few minutes talking about our performance in the first quarter, the broader commercial environment, and our expectations for the remainder of the year. Brian?

Thanks, John. In my role, I get to spend quite a bit of time with health care providers and hear the personal stories they share, which quickly put into perspective why our t:slim X2 insulin pump is rated number one. It's number one in terms of overall satisfaction, number one in terms of clinical outcomes, number one in ease of use, and number one in reducing burden. There is also a broad acknowledgment that Control-IQ technology continues to be best-in-class. Our automated correction bolus feature, customized profiles, superior overnight control, and ability to disconnect continue to be strong selling features. This is why over the past several years, including Q1 of this year, approximately half of our new customers report adopting insulin pump therapy for multiple daily injections, demonstrating that we are furthering our long-term goal to expand the insulin pump market. As we look at the broader commercial environment, the start to the year was largely consistent with what we've seen exiting 2022. While there were pressures associated with the competitor's new product launch in the United States, which created noise and delayed decision-making, the experience we've gained selling in this environment will benefit us in the back half of this year. Our sales team is excited about the increasing number of in-person diabetes education and advocacy events, and our clinical specialists are training more patients in person, which our customers report as a very positive experience. These interactions with our team contribute to overall customer satisfaction, which remains high for our technology and our services. That's why we've not seen a change in our modest attrition rate over the past few years. We monitor this in multiple ways, including through the incredible amount of therapy data regularly uploaded by our customers through our t:connect platform and renewal purchases. In fact, the number of repeat customers purchasing a new pump from Tandem once again increased meaningfully in Q1. It's also encouraging that the renewal opportunity this year is significantly higher than 2022 and continues to climb over the next few years in line with our historical pump shipments. The impact of the U.S. economic environment has also been consistent over the past several quarters. The more comprehensive payment plans now available to our customers have helped address this pressure, but it has also highlighted that there are some misconceptions held by patients and physicians about the affordability of insulin pump therapy through the DME channel. Our data shows that, on average, the cost for a direct Tandem customer is less than $50 monthly for our system, and nearly a third pay zero out of pocket for the pump itself. Our commercial team is focused on driving customer awareness of these facts to counter the perception of cost as a barrier to choosing the t:slim X2 for pump therapy. Outside the United States, there isn't the same pricing sensitivity, as most people are covered under government health care plans where little or no additional payments are required to adopt pump therapy. Related to our international scaling activity, we continue to work through the logistics of the inventory transition to our European distribution center, which was largely done in the first quarter. We've onboarded our distributors in France and Germany, which are two of the largest countries we serve. Once completed in the second quarter, this European distribution center will support roughly 70% of our sales outside the United States. We're already hearing positive feedback from our distribution partners that is easing the supply chain process. We now serve approximately 25 countries worldwide, and in 2023, we'll be focused on bringing the benefits to more people living with diabetes in those countries. As we've noted, most of these countries are only 10% to 20% penetrated, which presents an exciting longer-term opportunity. Overall, we continue to be mindful of our competition and will capitalize on the valuable knowledge we have gained so far to inform our commercial strategy as they expand their launches worldwide. We remain excited about the t:slim X2 system we offer today and the future technology right around the corner. We're starting to receive customer and health care provider inquiries about Mobi and early signs of anticipation are building, reinforcing our conviction in our strategy of offering a true portfolio of pumps to meet the needs of more people living with diabetes. With that, I will now turn the call over to Leigh.

Thank you, Brian. As a reminder, unless otherwise noted, the financial metrics I'll be discussing today are on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on the Investor Center portion of our website. Worldwide sales in the first quarter were $171 million, which was in line with the high end of our expectations and excludes the deferral associated with the U.S. Tandem Choice program that launched in late 2022. Nearly half of our sales were driven by 23,000 pump shipments. There were multiple unique factors in the quarter resulting in year-over-year comparisons that are not necessarily reflective of the progress of our business, such as the impact on sales of the ongoing operational transition to our European distribution center. Beginning with our results in the U.S., total sales were $133 million. We experienced typical seasonal trends in our first quarter performance associated with the insurance deductible resets. For example, the average sequential decline for pump shipments in the U.S. historically was approximately 30%. In the first quarter of 2023, the decline was 28% as we shipped 17,000 pumps. While the majority of these shipments were to new customers, renewals also provided a meaningful contribution in the quarter with strong growth year-over-year. We maintained the improvements we saw last year in our renewal rates on an increased number of new opportunities, which underscores our high customer satisfaction. Turning to supplies, we saw an increase in both our cartridges and infusion set sales in line with growth in our in-warranty installed base to approximately 300,000 people at the end of the first quarter. Similar to pumps and our historical experience, we saw insurance-related seasonality in the first quarter impacting customer ordering patterns. Overall, our direct mix of business in the U.S. and therefore, our pricing was consistent with 2022 at approximately 35% of sales. We are reaffirming our non-GAAP sales expectations in the U.S. for the full year in the range of $650 million to $660 million based on our current referral trends for new customers and strong renewal rates. We assume that sales will increase across the quarters and that the year will be back-end loaded due to normal seasonality. Considering the sequential step-up from Q1 to Q2, historical trends show a great deal of variability. The bottom end of the range has been a low double-digit increase over Q1, which is a good starting point for understanding how to think about this year as customers anticipate new product launches from our partners, competitors, and even our own Mobi launch. Outside the U.S., our sales in the first quarter were $38 million. We shipped approximately 6,000 pumps, bringing our estimated in-warranty customer base outside the United States to 130,000 people. This is a 30% increase in the number of our customers outside the U.S. compared with Q1 of last year. A big focus for our internal operations and supply chain team in the quarter was the continued transition to utilizing the European distribution center that Brian discussed. This is a positive move for our business, reducing logistical supply chain challenges, strengthening international distributor relations and bringing closer correlation between our pump shipments and pump placements on patients. The first quarter impact of this transition was approximately $18 million, reflected in our pump and supply sales. Although we have substantially completed the onboarding of the participating market, we anticipate approximately $7 million of remaining sales headwinds in the second quarter based on current distributor inventory levels. These pressures were partially offset in the first quarter by pricing benefits from the actual mix of ordering countries. Consistent with our previously provided guidance, our full-year expectations for OUS business are in the range of $235 million to $240 million. Turning to margins, our gross margin in the first quarter was in line with our expectations at 50% of sales. Similar to our experience in recent quarters, we benefited from higher average selling prices and reduced manufacturing costs, which were offset by an unfavorable product mix. While our supplies gross margin modestly improved over last year, our growing installed base of customers drove the proportion of lower-margin supply sales higher overall. Additionally, the impact of lower sales and higher costs associated with raw materials acquired in early 2022 further pressured gross margins. Those higher material costs combined with greater freight costs reduced gross margin by one percentage point. We anticipate that these higher inventory costs will be materially behind us in the second half of this year and maintain our expectations of approximately 52% gross margin for the full year. From an operating expense perspective, we continue to diligently manage spending, prioritize investments in future growth opportunities, and pursue additional measures to create efficiencies within the organization. In relation to those efforts, we recognized a one-time $79 million charge for our in-process R&D associated with the closing of the AMF Medical acquisition as well as $3 million in cash and non-cash severance costs in the quarter. Beyond these unique items, our increase in Q1 baseline spending compared to the fourth quarter was primarily associated with ongoing operational costs related to our recent acquisitions and Mobi development scale-up costs. When excluding the one-time transactions as well as depreciation, amortization, and non-cash stock-based compensation, our adjusted EBITDA margin was negative 12%. This was in line with our expectations, particularly in light of the sales impact of the European distribution center transition. We anticipate that our adjusted EBITDA margin will improve in the second quarter to negative mid-single digits, with a return to positive margins in the second half of the year when the distribution center transition is complete. Therefore, we are maintaining our expectations for adjusted EBITDA to be in the range of 5% to 6% on a full-year basis. We closed the quarter with total cash and investments of $520 million. Notably, we utilized $69 million in cash for the closing of the AMF Medical acquisition in the first quarter, but remain in a strong balance sheet position. To summarize our 2023 outlook, which is provided on a non-GAAP basis, our worldwide sales are estimated to be in the range of $885 million to $900 million, including sales outside the United States of $235 million to $240 million. Our gross margin expectation is approximately 52%, and adjusted EBITDA is estimated to be in the range of 5% to 6% of sales. Our non-cash P&L charges for stock compensation, depreciation, and amortization are expected to be approximately $115 million, of which $95 million is associated with stock compensation and $20 million with depreciation. As a reminder, unless otherwise stated, the financial metrics I discussed today are on a non-GAAP basis. Please refer to our earnings release and the Investor Center portion of our website for a reconciliation to the most directly comparable GAAP financial measure. I will now turn the call back to John.

Thanks, Leigh. Delivering on innovation is what drove Tandem to its leadership position in insulin therapy management. We are committed to continue doing so by serving the varying needs and preferences of people living with diabetes, the majority of whom use multiple daily injections today. This requires a true portfolio of solutions that centers around simplification and delivering choice. This means choice in features, choice in device form factor, and choice in how users can wear and operate their pump. We'll continue delivering on this vision in 2023 as we plan for our upcoming new product introductions. Our goal starting this Fall is for the t:slim X2 to be the first FDA-cleared insulin pump integrated with multiple CGM sensors. Choice of more than one CGM is not only a differentiator, it's a true realization of interoperability and opens the door for more people to adopt our technology. Our t:slim X2 pumps in the market are capable of being remotely updated to integrate with Dexcom's G7 and Abbott's FreeStyle Libre sensors. These no-cost software updates will be offered to all X2 users within their warranty period. We find that launching our products in a metered fashion provides the best experience for our health care providers, customers, and internal teams. The key phases, including starting with internal walkabout testing, followed by scaling availability in the United States and debt internationally. We've been working closely with Dexcom to finalize our Control-IQ integration with G7 and to coordinate its launch. Walkabout testing has been taking place and the launch will scale across the upcoming months, followed by our international rollout. We've also been working diligently on the integration of Abbott's FreeStyle Libre 2 and Libre 3 sensors. Walkabout testing using Libre 2 is also underway, and we plan to start a scaled launch in the U.S. in the third quarter with Libre 3 as a fast follow-up. We believe this path will allow Libre customers to enjoy the benefits of our Control-IQ technology as we finalize the integration with Libre 3. Outside the United States, we intend to launch directly with the Libre 3 sensor as the implementation path aligns with our target launch timing. The next new technology we are preparing to launch following FDA clearance is a Tandem Mobi system. As a reminder, the Mobi pump is about half the size of the t:slim and operated by a smartphone through a mobile application. It's designed to expand our portfolio of diabetes solutions and offer people greater choice in how they wear and operate their pump. Our dialog with the agency remains constructive as we work through the process of FDA review and responding to questions. In the meantime, we continue to prepare for its launch in the second half of the year. As you can see, we are making great progress with our future products in addition to the strength that we offer in our t:slim X2 today. We have historically introduced new diabetes technologies at an industry-leading pace, so it's particularly noteworthy that we will be bringing multiple new products to market in the coming months. Our employees are extraordinary, and I'd like to express our thanks to everyone for your efforts in making both Tandem and our technology offerings positively different. We remain confident in our ability to achieve our goals for the year, which focuses on successfully executing our business plan, supporting our customers, and building shareholder value. With that, I'd like to ask the operator to open the call up for questions.

And our first question is from Matt Miksic with Barclays. Your line is open.

Hi, thanks for taking the question, and congrats on a really solid quarter here. So maybe, John, if you could describe the walkabout process and the sort of ramp-up of the integration that you talked about, a little bit different than the sort of clearance and launch cadence that we're used to. And then I just have one follow-up.

Sure. Well, the sequence of release is really going to follow the sequence of the FDA approvals for both Dexcom and Abbott. So Dexcom will be first, and then that will be followed by Abbott. As I said in the prepared remarks, we conduct this walkabout testing really to help us understand and optimize system performance and customer experience. It's followed by a scaled launch, which is going to happen in the upcoming months. We would expect to see a meaningful number of customers using the t:slim G7 in the third quarter. So I think that when it comes to the international launch, it will follow the U.S. launch and will occur on a country-by-country basis for G7, commencing relatively shortly after the U.S. launch starts. When it comes to the Abbott product, we're also in the walkabout testing phase right now, and that scaled launch process is going to be delayed a little compared to Dexcom. It will happen in the third quarter, and so I think that it will happen in the third quarter, and we would see meaningful numbers of people using the system as we enter the fourth quarter.

That's great. Thanks so much for the color. And one follow-up, if I could, John. We talked about this process, and I pick up on this a little bit when we talk to clinicians and how they're seeing patient choice kind of enter new patients considering the two leading closed-loop systems out there in the market. It seems to have stabilized in sort of a 60%, 70% of new patients may be flowing to the other system in the very anecdotal checks that we've performed. But what's your sense? I mean, is it sort of crested? Is it stable? Is there anything else coming up in the narrative and dialog that clinicians are having with patients that gives us a sense of what the environment is like at the moment?

Yes, Matt, I think you're right. I think we sort of see the situation as having stabilized. There is still pressure, for sure, but it's not any better, and it's not any worse. So it has been entering this year. I think we probably expect to see the pressure for another quarter or two until we start to see the benefits of these new technologies and new innovations come to market in the second half. And so we would agree with your characterization.

One moment for our next question. And our next question is from Steven Lichtman with Oppenheimer. Your line is open.

Thank you. Good evening everyone. I have just one question and a quick clarification regarding your progress on the integration with the CGM that is not included in guidance. Will there be any contribution from this in the latter part of the year? That's my clarification. Additionally, Brian, could you expand on your earlier comments about the experiences you've gained from competing with newer products in the market and how this might benefit you in the latter half of the year? You mentioned pricing dynamics; could you please clarify what you meant by that and what your plans are moving forward? Thanks.

Sure. So Leigh, you want to catch the first one?

Sure. I'll start by confirming that we do not have any new product contribution in the guidance for this year.

And to my piece, I commented earlier that Q1 was a lot like Q4. The environment is pretty stable right now from a COVID perspective, and we are not seeing those challenges, maybe a few staffing challenges. So now we sit with some of the economic pressures. I think we've addressed those very well. Obviously, the competitive piece, as part of my prepared remarks, is something that we see. I would say that most of our conversations with our health care providers start with the strength of Control-IQ and the support they receive from the Tandem team. Then we take a look at that six to nine month window now that the competitive product has been available on the market, and those patients are coming back to the endocrinologists with feedback to see how they are doing. The physicians can see how they are doing, and again, it highlights the strength of our product and to some extent, the strength of their products. We feel very good about our offering and continue to lean into the size, the touchscreen, the ability to disconnect, and all the features that folks have liked, and our team has done a tremendous job there. Anytime there is a product introduction like that, it takes a little while to play out and that pent-up demand and early excitement, but I think we're moving into a more stable environment now going into Q2 and the rest of the year.

Great. Thanks.

Thanks, Steve.

One moment for our next question. And our next question is from Chris Pasquale with Nephron Research. Your line is open.

Yes, thanks. John, one question on Mobi and then one just on the model. Are you expecting any slowdown in pump shipments as Mobi gets closer to the finish line here? You talked about anticipation starting to build. We have seen in the past when you guys have launched new products, a bit of an air pocket in front of that. Is that contemplated in your outlook for the year?

I'll take that one, Chris. Yes, we typically see a noise in advance of it, a new product is introduced into the market, whether it's a competitive product or our own product. It's usually the strongest in the time from when FDA approval comes around that time up until the point it's actually released on the market. So when we look at the cadence of how sales will spread across the year, we're taking that into consideration, which is part of the reason when we talk about the sequential step-up into Q2, when we think that noise might begin, we're cautioning you to start on the end of the low double-digit step-up, which is the low end of the range that we've seen historically.

Okay. That's helpful. And then just looking at the international pump revenue this quarter, there was a pretty big delta between pumps shipped and the revenue you guys recognized. There seems to imply a step-up in ASP. Is that just because of mix? Or is there another dynamic happening there related to the distribution center?

It actually is related to the distribution center, but it is a price benefit. So if you think about the sales headwind that we saw, it was within particular countries. And so it was a different mix of ordering countries within the quarter than what we would see on a normalized basis, which gave us that price benefit this quarter. It's not something, though, that I would model or expect to continue for the future.

Okay, thank you.

Thank you. One moment for our next question. Our next question comes from Brooks O'Neil with Lake Street Capital Markets. Your line is open.

Good afternoon. So the last few product innovations you guys have delivered have largely been delivered through the free software download, and I know we're anticipating that for the integration with G7 and Libre products. How do you view the impact on your revenue line from those free software downloads versus the impact you might anticipate from Mobi, which is a complete new form factor?

Hi Brooks, first of all, how are you doing? We expect to see a positive revenue impact from the G7 launch, as it features a new design and faster startup time. Feedback from users has been very favorable, and we believe this will contribute positively, as Leigh mentioned. Additionally, we think it could encourage people to renew their subscriptions sooner. When considering Abbott, there are a significant number of Type 1 users who are currently using Abbott sensors without pump therapy, presenting a larger opportunity compared to Dexcom. I also believe that when we introduce Mobi, it will bring a new form factor controlled by a mobile app, offering ease and simplicity of use. We anticipate that all three developments will positively influence sales. We expect to see some impact in the latter part of this year, and the good news for 2024 is that we will fully realize the benefits of these products, including Tandem Source, throughout the entire year.

Got it. Thank you very much.

Thank you.

One moment for our next question. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Hi, this is Nathan Treybeck on for Larry. Can you talk about how new starts trended in Q1 relative to renewal and the underlying drivers? And I guess what you're seeing in April so far? Thanks.

Sure. The way this quarter shaped up, as John and Brian both said, it was pretty stable, I would say in consistent with the type of environment we were seeing in the fourth quarter. So as we came into the year, we anticipated that overall pump shipments in the U.S. would follow typical sequential trends, which is a decline of about 30%. In this quarter, indeed, the decline was about 28% for new and renewal. Renewal pumps are continuing to grow to be a bigger piece of the pumps that we ship, but new pump starts are actually still the majority there. And so I would say if the dynamics are the same and that we've seen consistent strong renewals even in light of this environment, and the new pump versus where we have seen the pressure. But as we've talked about, we still firmly believe we have the best product out there, and we continue to fight for that new market share.

Great. And if I could just follow-up. In terms of new competition, your competitor recently got approval for their 780G pump in the U.S. How are you thinking about the competitive landscape once that is on the market? Thanks.

Well, we've been competing against that product now in OUS countries for many quarters. We know that once the product does come to market, as I said sometime this summer, we expect them to step up promotion. But we think we have a better product. We think we have the confidence and trust of the endo community in the States. When you look at the new device, it's certainly a better device, but it's still the same form factor, and it has a sensor that requires fingersticks. So while there are new competitive products in the market, first of all, it's not a surprise. We've been expecting this for a while, and it hasn't changed our conviction. We remain confident in our ability to hit our goals for the year even with this coming to market mid-year.

Thank you.

One moment for our next question. Our next question comes from Danielle Antalffy with UBS. Your line is open.

Hey, good afternoon everyone. Thanks so much for taking the question. I just have two questions, if I could. One, on the competitive environment. And that's really around what's factored in. I think we were all a little surprised about the recent product approval from one of the major competitors. So what's factored into the guide there? And then my second question, I'll just ask it now. And John, you did touch on this a little bit, but just trying to think about the opportunity that exists here with Libre integration, given the size of their installed base. And obviously, it's a smaller installed base or they have less market share, I should say, in type 1. But is this something that you think could be an inflection driver and sort of change the tide here back to accelerating growth? Or is this more muted? I mean, how should we be thinking about this? I appreciate it's not in '23 numbers, but as we look at '24, etc. Thanks so much.

Sure. Thanks for the questions, Danielle. I'll take the first one about what's factored in the guidance in relation to the competitive environment. We do always, when a new product is being introduced, factor in that there will be noise in the market. In fact, we've been anticipating the approval of this product now for a year or two, so it's something that we've always assumed could be just right around the corner. Now that we have more certainty about the timing, as we look into Q2, we think it will be noisy, which is why when we look at our historical range of how Q1 usually transitions into Q2, we expect to be on the low end of that with low double-digits in terms of sequential growth, with that kind of noise coming into the market. We also add that there are going to be conversations with people who might be waiting for G7 to be available on the pump, as well as people starting to talk about Mobi. That's what we've thought about from a competitive perspective and the noise that could come this year.

And Danielle, regarding Libre, I think the first thing to say that's important is that we're all about providing choice. We are not engaged in any of the competitive competition between the sensor companies. All we're trying to do is provide a device that has a choice of sensors so that people who have a natural tendency to choose Dexcom can, and if they have an interest in Abbott, they can do that also. But that being said, as we understand it, there's approximately 300,000 people who have type 1 in the U.S. that use the Abbott sensor. Certainly, that becomes an opportunity for us to take advantage of that community. If we even get 30% or 35% penetration with that community, it means 100,000 people that are potential candidates for pump therapy. So I think that there is a big opportunity with the Abbott device, and I think it's also larger outside the United States. So we look at it as a crucial growth driver that will help us reach the numbers we've talked about in the 2027 timeframe. It's an important part of our pipeline going forward.

Thank you.

One moment for our next question. Our next question comes from Matt Taylor with Jefferies.

Hi, thanks for taking the question. Hey, John and Leigh, I just wanted to follow up on that line of thinking about the Abbott opportunity. And John, you just mentioned 30% to 35%. Have you done market research on the percentage of people that could convert? Or how do you think about the opportunity overall for them to convert? And your opportunity within that?

Yes. And as I said, I think that there's about 300,000. The current penetration rate of pump therapy in the U.S. is about 35%. So in my mind, that sort of defines a starting point. We certainly are going to have to sell to them, help convince them of the benefits of pump therapy and just work the process. But I think that when we set a goal for ourselves, I think that's a reasonable starting point. As they become more familiar with the benefits of pump therapy, connected to a sensor that they're comfortable with, we think that represents a significant opportunity for growth in the upcoming couple of years.

Maybe just one color. I mean, that makes sense. Could you help us think about the timeframe that you would expect some of those folks to convert? And what are the key factors? And whether they're converting quarter one or quarter six after the integration?

I think that it's not going to happen overnight, for sure. There is definitely going to be a selling process, a promotion, and co-marketing process that's going to have to happen. But I think that it does represent a large opportunity for us, and I think it's something that our sales force is excited to get involved in.

One moment for our next question. Our next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Thank you for that question. This one is directed to Leigh and has two parts. First, is there any noticeable change regarding MDI patients or competitive conversions that you would like to highlight for the quarter? More importantly, as I review the model and see that you are maintaining the U.S. number for the full year, your comments suggest a low double-digit figure compared to what you just reported in the U.S. Based on that, I calculate that approximately 42% of the full-year number is expected to come from the first half. Historically, last year it was 47% and the year prior it was 44%. This indicates a significant increase needed in the second half of the year with competition becoming more prominent in the market, excluding Mobi, among others. Can you explain why you are confident in reaching 650, even at the low end of the range? Can you walk us through how you plan to achieve that?

Sure. Thanks for the questions, Matt. I'll start with the first one on how new pumpers broke down. It again remained consistent at that 50-50 mix of about 50% coming from MDI and 50% from competitive conversions. So no change in those dynamics there today. But again, just to remark that renewals are becoming a much bigger contribution to our pump shipments every quarter. And that leads to the second part of your question about the U.S. this year and why we're so confident in the back half. First, I would say 2022 probably isn't a good comp for how the first half and second half were split, just based on the dynamics across the year, it was a much healthier environment in the first half than it was in the second half. A 40-60 split isn't too unusual for what we've seen in our history. And this year, the conviction comes from the fact that partially more of our business is coming from recurring revenue streams, so more like 60% this year, which is higher than what we've seen in the past when you factor in the supply sales stream that we see from our large installed base as well as renewals growing pretty significantly. If we look four years ago, about 50,000 people bought Tandem pumps in the U.S., up from 30,000 the year before. Those have strong seasonal scale. So when you just think about normal seasonality, predictability of renewals coming, and the predictable supply sales, it seems pretty normal for us to be able to achieve that kind of year, and we have a high level of conviction in doing that.

Got it. Thank you.

One moment for our next question. Our next question comes from Jayson Bedford with Raymond James. Your line is open.

Good afternoon. I have a couple of questions, mainly for Leigh. Regarding international, the historical sequential trends are quite varied. You mentioned the $7 million expected impact from the distributor situation this year in the second quarter. Can you provide any guidance on international revenue for that period?

I think the way to look at it is that we experienced a headwind in the fourth quarter of about $6 million, and it was about $18 million in Q1. When you factor those figures in, considering there's still some variability due to our ongoing transition, this brings us close to what I would call a normalized run rate. You can use that as a basis for what to expect as we look ahead for our international business. We remain very excited about the opportunities with new product introductions outside the U.S., particularly regarding Control-IQ, which has significant growth potential. We just need to navigate through these short-term challenges.

Okay. And just the up low double-digit comment that you've made here, that was related to the U.S. business, right?

Yes. Thanks for asking that for clarification. It's U.S. pump shipments, which is what I'm really referring to. When we look at our traditional seasonal patterns there, that seems like a good place to think about the starting point for Q2 of this year.

Okay. And then just to true up kind of the apples-to-apples comparison here. I appreciate the 430,000 in-warranty user comment. What was the in-warranty installed base exiting '22? Just want to make sure we're comparing the installed base on an apples-to-apples basis.

Sure. It was about 420,000. There's one thing I'd like to point out there. I think it's a question I've gotten a number of times is how they translate that installed base number into what is an ordering base number and/or how do view attrition. That installed base number that we provide is intended to be representative of who is in warranty in any given period. While I think it's a good directional tool for modeling supplies, it's not the way to measure attrition because it's straight math. As you add new people into the warranty base, you drop off people whose warranties have expired. That's not how the ordering patterns work. We have people who have stopped using the pump in-warranty. We have many people who use the pump out of warranty. So it's not necessarily a way to think about attrition, but it is good directionally for modeling, like I said, supplies and thinking about renewal opportunities.

And your comment is you don't believe…

Jayson, I'm going to need to ask you to jump back in the queue.

Yes, sorry.

One moment for our next question. Our next question comes from Joanne Wuensch with Citi. Your line is open.

Good evening. I'm just going to get my head around season two is the only thing difference between that and the previous season, the addition of G7 and Libre 3. And then part of that is, so you'll be going to market with Mobi as well as the t:slim 2. How does your sales force sort of decide which one to sell on which day? Thank you.

So Joanne, I just want to be sure I understand. Right now, we have t:slim X2 on the market. We are going to add the capability for G7 and Libre 2 and 3 to t:slim X2. We will be providing a software update to the current installed base so that they can actually update and use these new sensors as they come to market. We are also working on the t:slim X3, which is a technology upgrade to t:slim X2 and that's something that's going to be coming out here in the near future. So there's a number of technology upgrades that will enhance capability and microprocessing skills. I do want to ensure I understand the question when you're asking. I'm not sure if I did.

Yes, you did. I probably didn't say it as clearly as you answered it. But t:slim 3 is coming out at the end of this year also. I'm just trying to get my head around how many new things you're talking about in the second half of the year?

Well, right now, we have four new products. We have Tandem Source, which is something we really haven't talked about that much, and that's coming out here in the relatively near future. As we talked about the two sensor integrations, we expect to start scaling launch here in the near future with G7, and we'll start the scaling launch of that in the third quarter. We are waiting for approval on Mobi. There are really four products that we're looking at happening here in the third and fourth quarter of this year. Tandem t:slim X3 is out in time. It will be the next product, but we haven't been specific about when it's going to be available to the marketplace. But it's out there probably 12 to 18 months from now.

Perfect. Thank you so much.

You're welcome.

One moment for our next question. Our next question comes from Matthew Blackman with Stifel. Your line is open.

Good afternoon, everybody. Thanks for taking my question. I've got one clarification question for Leigh and then a bigger picture question. Maybe, Leigh, just to start, I'm not sure if we're doing the math right, and you gave us some different metrics to play with at this time. But on renewals, was the 1Q number something approaching 5,000 pumps, something in that neighborhood? Just any help there. And then I guess a sort of a follow-up question, and this is probably for John and/or Brian. I was hoping you'd give us some sense of your strategy in the primary care channel. There's obviously still some opportunity in endo offices, but it seemed to be a large still untapped cohort of type 1 and type 2 intensive that use PCPs. I know today, you target high-prescribing insulin docs, and that captures some of the opportunity, but do you need to go deeper and broader than that? If so, what could that look like? And frankly, why wouldn't that be an initiative that you'd be starting now if you aren't already?

Yes. I’ll quickly address the renewals question. Our renewals continue to be strong. It’s important to highlight that our customer conversion rate when warranties expire remained consistent this quarter compared to last year, even in the first quarter. While the current environment is more challenging than before, it reflects our customers' loyalty to our product. They appreciate both the product and our customer service. Additionally, the decline in pump shipments from the fourth quarter to the first quarter was similar for both renewals and new customers. Renewals are becoming a larger percentage of our shipments each quarter, and we anticipate this trend to continue as opportunities expand. New pumpers will still make up the majority. I hope this information helps you understand the renewals trajectory.

Yes, Brian, why don't you take the question on primary care physicians?

Yes. We definitely do see primary care physicians where there is a desire to interact with a pump company like Tandem. I would say all of our territories have a certain percentage of PCPs that they do call on. We work very closely with our CGM partners as well who have moved into that space more aggressively. When they start to get inquiries about pump therapy or the opportunity to work with their patients, they pull us into several of those meetings. As physicians become more comfortable with that, we certainly will spend time with anyone who is interested in learning more about pump therapy, explaining it to their patients, and quite frankly, getting trained on it and supporting them just like we would in an endocrinology office. The majority of our time is spent in our big diabetes education centers where we see the type 1s predominantly sitting. As we start to look at type 2 more aggressively in the future with Control-IQ and our future products, that will become probably a bigger piece of our strategy to grow in the primary care space.

All right. Thank you.

Yep.

One moment for our next question. Our next question comes from Joshua Jennings with TD Cowen. Your line is open.

Hi, good afternoon. Thanks for taking the questions. Wanted to ask about the cost per month for patients for pumps is less than $50. Does that include the expenses related to CGM and the accessories or infusion sets within the DME channel? And can patients access infusion sets on reservoir and CGMs using their pharmacy benefit and pair them with Tandem pump t:slim X2 through the DME channel? Then, I have one follow-up.

I'll take that one. Yes. So the infusion sets and cartridges are only available through the DME channel today. And that $50 or less per month does not factor in the CGM portion of their therapy; it's just strictly the pump spread out over time as well as the infusion sets and cartridges necessary to operate the system.

Can Tandem patients access their CGM through their pharmacy benefit instead of the DME to cut down on costs for the CGM?

Absolutely. They have a choice if they want to get it in conjunction with their pump supplies or they can separate those two and get those through the pharmacy channel. If their benefits allow it, it works for them; there's no hesitation to do that if available for them.

Great. And then just on checking with endocrinologists and the very positive feedback, clearly, as you're all well aware of the Control-IQ algorithm, sometimes we get feedback on just cross-trial comparisons being challenging. So my question is, one, can you just remind us of the roadmap of enhancing the Control-IQ algorithm go? And then how are you thinking about investing in a head-to-head trial against your competition? Would that be worthwhile to kind of formally put the stake in the ground that the Control-IQ algo was the premier solution?

Yes, sure. We have been since 2015 significantly expanding our internal capabilities to develop algorithms, and we have been working on it since that time. 2015 was when we first established the relationship with TypeZero. I think we established that relationship because we didn't have the capabilities initially. But certainly, we have been since then, and we continue to work with a number of universities and other institutions to just improve the knowledge and to run clinical studies and just get better feedback on the performance and ideas on where we ought to be heading. So I will say that, as you know, we probably have our second clinical study underway right now to evaluate certain features for Control-IQ. We expect that to inform a pivotal study that would be run sometime next year, and that study would be what would be required to get clinical approval for that next-generation system. I think some of the key features we've talked about in the past have just been simplification of the bolus workflow and personalization. There are a number of things we can do to improve the overall experience and potentially make the algorithm more aggressive. That's what we're working on right now. I think as we get closer to define a pivotal study, we'll talk more about what the specifics are. In addition to that, we are working on what I call Control-IQ 1.5, an algorithm that's going to enable a broader cross-section of people with larger body mass and also the younger children with smaller body masses to use the system. A few features will be available in that, and that will be available in a relatively short period, probably sometime next year. But most of the work we're focused on right now is really Control-IQ 2.0, and we're also looking beyond that. Certainly, we are working towards ultimately getting a fully closed-loop system, but that's going to be out in time.

Great. And then any ambitions to hold support or invest in the head-to-head trial with competitive technologies?

I think, Joshua, right now, there's just a lot of clinical data out there. I think we feel clinical data stands for itself, and it's strong. I think we compete quite well both from the sort of the clinical information as well as the real-world data. At this point in time, I don't think we see the need to do that, and I think that when you talk to people about it, they certainly agree with us that our device is the best on the market.

Understood. Thanks a lot, John.

You're welcome. Take care.

One moment for our last question. Our final question comes from Travis Steed with Bank of America Securities. Your line is open.

Hi, this is Stephanie Piazzola on for Travis. Thanks for taking the question. I heard the clarification on the U.S. pump shipments up low double-digits next quarter, but wanted to see how we should think about overall Q2 revenue on a sequential basis. The Street is at $215 million. So I wanted to see if you had any thoughts there. And then on the Q2 EBITDA margin guide of negative mid-single digits previously, it seems like it would be flat in Q2. So I was wondering if that's gotten worse versus before and if so, why?

Thanks for the question, Stephanie. So starting with sales worldwide in Q2. I think it was very important to get the information about where we think U.S. pump shipments trends because that's one of the biggest drivers, which is I would expect a softer expectation than what people have right now. It's really an anticipation that the market could be noisy in the second quarter, but we think it's temporary. It's really ahead of some really exciting products that are around the corner for us. Until the newest competitive product starts coming out to market, which we feel will compete effectively against. The other piece that I think is really important to understand about the expectations for Q2 is how the distribution center transition outside the U.S. is impacting the year. I had originally given the guidance that it's $25 million for the year and only said heavily in the first quarter. So now I think it's important to take note that that $7 million will be a headwind in the second quarter, which I think also will soften expectations from where they are today. We want to be cautious as we step into Q2 and the environment we're in. We feel like everything that we're talking about, they're all just temporary items, and we feel convicted that we can achieve the second half after what we see in the second quarter. To your question about the EBITDA, a lot of that is just translating what's happening from the OUS market. As you think about the sales trajectory, we're closely managing costs, but it's really the sales that are influencing what EBITDA looks like. What it looked like in the first quarter and what we expect it to look like in the second quarter. Once we get past that transition, EBITDA will track more closely to pump sales across the year. We fully expect to be back to positive in the third quarter and for the back half of the year.

One moment for our next question. Our next question comes from Alex Nowak with Craig-Hallum.

Okay, great. Good afternoon everyone. One is just the latest on the back and forth that the FDA and the Mobi submission. Has there been any questions that have been raised, kind of soft clock? Have you moved into labeling discussions? Just where does that stand?

We're having a constructive dialogue with them right now. I would say that we're at a point where we're responding to questions, which in some cases take time because there might be additional testing and things like that, that's going on. I would say it's constructive, and we see a lot more activity from the FDA in the last couple of quarters, right? As we've said in the past, though, it's difficult to predict exactly when we would expect to get approval. The organization is preparing that that's going to happen in the second half of this year, and it will take us roughly a quarter to have the device on the market from the moment we actually receive the clearance.

Okay, that makes sense. And then in the past, you've talked about the operating cost base that, well, I guess, if you look at the operating cost base, you have doubled that size of the expense lines versus 2021. But the revenues haven't doubled. Now I know a lot has been happening in the last two years, but you're also getting ready for a lot of new product enhancements coming. How should we start thinking about efficiencies and margins over the next couple of quarters, next year or so when these new products come online? Should a lot of that start to drop to the bottom line? And just help me get back to this free cash flow positive territory that we're pretty close at but now we're a little bit further away.

Right. The first half of this year is orally pressured by this transition that we're seeing outside the U.S. So that's one of the biggest pressure points that prevent us from being positive on an EBITDA line for this past quarter and the upcoming quarter. It takes we're prudently managing our spending. We are looking very closely at where we're putting our dollars, where are the right places to make investments, and more importantly, can we find efficiencies, not only for right now but also for the longer term. We continue to focus closely on our customer-facing services that we offered, moving to more automated or digital solutions. That's where Tandem Source as a new product will really come into play. It will be very helpful from the physician perspective and the efficiency it can create in their practices, but also internally and how we can offer patients something more akin to a retail experience, as instead of a lot of the required human interaction. We look forward, that's one of our biggest opportunities for the longer term to create efficiencies within the operating expense line to help us drive those margins up, and we remain confident that we can achieve our long-term objectives.

And we have our final question comes from Mike Polark with Wolfe Research. Your line is open.

Hey, good afternoon. Thank you for the questions. I have a question about this kind of emerging, bring your own sensor paradigm. Do you have any early flavor for whether Control-IQ algorithm performs similarly with the Dexcom products as Libre? Or are you sorting that out now? Kind of if you could speculate what's the future state of this? Are the pumps and sensors indifferent? Or might there be some quality and performance variances that you eventually know about in one, two, three years?

I think that we've carefully evaluated the Abbott sensor, and I think we feel very confident that it will perform very well with Control-IQ. We will plan on using the sensor data as soon as we initiate the sensor session to power the system and to actually inform Control-IQ. We have confidence that the system is going to work well. I think it just comes down to personal preferences. Some people prefer one sensor over the other. I think that it just gives people a choice. What's going to happen is there will simply just be a touchscreen on the system, and you'll be able to choose whichever sensor you prefer. I think that's the idea here: just to give people a choice.

Thank you. And a boring follow-up. Reporting change supplies now instead of infusion sets and cartridges. Is that permanent? Or will there be a breakout in some other materials? If not, why the change?

Sure. You're right; we did make that change this quarter. Frankly, the relationship between cartridges and infusion has been so consistent that it seemed like an unnecessary level of detail. The way it has been tracking, you can usually see that infusion set sales run about 2x to 2.5x cartridge sales, and it follows the use pattern of the patient. So there's not a lot of variation there.

Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.