Tandem Diabetes Care Inc Q2 FY2023 Earnings Call

Thank you for joining us, and welcome to Tandem's Second Quarter 2023 Earnings Call. I will now turn the call over to Executive Vice President and Chief Administrative Officer, Susan Morrison. Please continue.

Thank you. Hello, everyone, and thank you for joining Tandem's 2023 Second Quarter Earnings Call. Today's discussion will include forward-looking statements that reflect management's expectations about future events, product development timelines, financial performance, and operating plans, and these are relevant as of today. There are risks and uncertainties that could lead actual results to differ significantly from those we expect or project in these forward-looking statements. A list of factors that could affect actual results is included in our press release issued earlier today, in the Risk Factors section, and in our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and other SEC filings. We do not assume any obligation to publicly update any forward-looking statements due to new information, future events, or other factors. Today's discussion will also reference various GAAP and non-GAAP financial measures. Non-GAAP financial measures are intended to provide our investors with information that reflects our core operating performance and ongoing business operations. We believe that these non-GAAP measures facilitate better comparisons of operating results across different reporting periods. Any non-GAAP information should not be viewed as a replacement 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 section of our website for reconciling these measures with their closest GAAP financial measure. Today's call participants include John Sheridan, our President and CEO, and Leigh Vosseller, our Executive Vice President and Chief Financial Officer. After their prepared remarks, we will open the floor to questions. John, you may begin.

Thanks, Susan, and welcome, everyone, to today's call. Reflecting on Tandem's performance in the first half of the year and the second quarter in particular, I am proud of our execution across the business. We achieved our sales expectations while demonstrating operational improvement as we exceeded our profitability target and returned to positive adjusted EBITDA. We also made exceptional progress with our new product innovations by starting the rollout of Tandem Source, preparing for the launch of two new sensor integrations, and most recently, reaching the exciting milestone of FDA clearance for Tandem Mobi. With these four new products, we are expanding our reach into different customer segments of the market beyond where we operate today, providing additional choice to new and existing customers in how they manage their diabetes and demonstrating our excellence in delivering digital solutions to optimize care. This sets us up for another exciting period in the company's history, reminiscent of when we first introduced Control-IQ to the market. These new products are also important in fulfilling our vision of having a unique portfolio of devices that meet the diverse needs of people living with diabetes and reinforce leadership in automated insulin delivery. We anticipate that this wave of innovation may create turbulence in the overall market in the near term; to ensure that we maintain the highest level of customer satisfaction during the busiest months of the year, as we previously discussed, we will be scaling these launches throughout the second half of the year and into 2024. Customer awareness and excitement is quickly building, and this may impact the timing of purchasing decisions, particularly as it relates to Tandem Mobi, as customers weigh access to new products against the reset of deductibles in January. With this backdrop, we have introduced new promotional pricing for our Tandem Choice program for the remainder of the year. The program now provides customers purchasing a new t:slim X2 access to Tandem Mobi once it becomes broadly available for $199 rather than the $999 it was before clearance. This helps provide customers seamless access to current technologies and may reduce the pausing dynamic we've seen historically with new product launches between the time the FDA clears the product and its availability. Having said that, it's difficult to predict the impact that this will have on our sales for the remainder of the year. For that reason, and in combination with an increasingly competitive environment worldwide, we feel it's prudent to reset our 2023 guidance with a low point for expectations and a starting baseline for 2024 while we focus on driving the business. By doing so, we are establishing a path for Tandem to deliver sustainable growth, driven by our market-leading innovation pipeline. As we prepare to expand our technology offerings this fall, we're building on our strong reputation and decade of experience offering high-quality diabetes solutions and services. This was evident in the second quarter as our t:slim X2 continues to stand out as the number one rated automated insulin delivery system in terms of overall customer satisfaction. This was repeatedly reinforced as I spoke directly with healthcare providers at the recent American Diabetes Association Scientific Sessions that took place here in San Diego. Providers spoke to the importance of their patients having options for wearability, the benefits of pump attachability, and how different infusion set materials and cannula insertion angles impact their patients' comfort and user experience. These comments underscore the importance of recognizing that people need options in how they wear and how they use their AID systems and reinforce our strategy of enabling our customers to personalize multiple aspects of that system. Another highlight was the positive reaction to demonstrations of Tandem Source at our booth. Keep in mind, this is our global data management application that was designed specifically with clinicians in mind. It provides a central location and comprehensive reporting to view critical patient data so they can spot trends and put these insights into use with our patients. We began rolling it out in the United States in June and will continue to progress this launch in the coming months, with plans to deploy it globally on a country-by-country basis thereafter. For healthcare providers, Tandem Source becomes even more meaningful with Tandem Mobi, which offers smartphone control and will be continuously connected to the cloud by a mobile app. For customers, it's a platform to see important therapy data, and we plan to build around this in the future by adding experience-enhancing features for our customers that streamline supply reordering and new feature training. The ADA conference also reinforced that there's currently a high level of activity in diabetes devices, and that related pressure is likely to continue as new offerings launch both in the U.S. and internationally. In the second quarter, we began hearing more from our distribution partners outside the United States about new pump entrants, only some of which we have experience selling against. Even with an anticipated increase in competition, our longer-term opportunity outside the United States is meaningful. Our t:slim X2 with Control-IQ has been shown to deliver immediate and sustained benefits in all populations, and we are still in the early stages of building market awareness internationally. In the near term, we're cautious that external pressures may increase in advance of our own new product launches, the first of which will be new CGM integrations. t:slim X2 integrations with Dexcom G7 and FreeStyle Libre 2 sensors are on track for a scaled launch beginning in the United States this fall. We anticipate that t:slim X2 will be the first FDA-cleared pump that will offer user actions and CGM sensor integrations. Choice of more than one CGM is not only a differentiator; it's the true realization of interoperability and empowers users to make the best sensor decision for their needs and preferences. We want our customers to have the benefits of the latest CGM technologies, and being first to market with these new CGMs is evidence of our commitment to enable access and lead in systems integration. It takes a lot of collaboration and coordination to launch integrated CGM systems. I'd like to thank Dexcom for their continued partnership and Abbott for their new partnership as we bring the benefits of our AID systems to even more people living with diabetes. In the United States, we are planning for Dexcom G7 integration to be broadly available in the first part of Q4 and FreeStyle Libre 2 integration to be broadly available in the middle of Q4. These will be followed by international launches with Dexcom G7 and FreeStyle Libre 3. The pump software updates for these integrations will be offered to all in-warranty customers for no charge and can be completed from a personal computer. Turning to our next new innovation, Tandem Mobi is the world's smallest durable automated insulin delivery system. Redefined and capable of durable pump miniaturization, Mobi is leading the way in creating a whole new category of devices for insulin therapy. I am particularly proud of this clearance as it is our first expansion to our family of pump hardware offerings and is an opportunity to bring the benefit of our technologies to a segment of people living with diabetes who otherwise would not likely choose to adopt pump therapy. Already, we're hearing from future customers who plan to choose Mobi for its discrete small size, multiple wear options, iOS control, and our number one rated AID algorithm. In the second quarter, nearly two-thirds of our sales leadership reported that they are experiencing some level of new customer pausing in making their purchasing decisions to await the availability of Mobi, and reported that this dynamic was even greater with our own renewal customers. This enthusiasm has grown even more following FDA clearance, and thousands of people have signed up on our website and through our call center for more information on Mobi's availability. We plan to kick off our scale launch of Mobi with a limited release in early Q4, followed by broad availability in early 2024. Launching a new platform and the associated physician and customer education that goes along with doing it right takes significant time from our talented sales and clinical team. The fourth quarter is a period in which their time is already in high demand due to the seasonality of our U.S. business as they work to help customers maximize their insurance benefits before the typical reset at the end of the year. This is why making Mobi available through a scaled launch is even more important during this period. Turning to our pipeline beyond these near-term offerings, we are continuing development work for our hardware portfolio, which includes the t:slim X3, an extended wear infusion set, a tubeless cartridge, and infusion site feature for Mobi and SIG, our durable patch pump. We are also very active clinically; enrollment for a study of people with type 2 diabetes using Control-IQ, which includes a randomized control arm, began in the second quarter. We are also preparing for a clinical study for study set, our extended wear infusion set, and the first in-human trial to begin in the fourth quarter of this year. As you can see, we are executing well and are confident that we have the most exciting product portfolio in insulin therapy management. It's part of our commitment to relentless innovation, revolutionary customer experience, and operational excellence, which are mission-driven building blocks of our company. I'd like to thank our employees for their hard work in delivering on each of these in the second quarter. The team's passion is how we are navigating 2023 and positioning Tandem for success. With that, I'd like to turn the call over to Leigh to provide more information on the quarter and our guidance and expectations for the year. Here you go, Leigh?

Thank you, John. 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. We exited the second quarter with a record installed base, nearly 440,000 people worldwide using our t:slim X2 insulin pump, representing 16% year-over-year growth. Our second-quarter performance was in line with expectations, generating $198 million in worldwide sales with over 29,000 pump shipments. As in the first quarter, comparisons to 2022 do not adequately portray our continued operational execution, particularly concerning our sales outside the United States and advancements in our product pipeline. In the U.S., sales were $145 million in the second quarter, with pump shipments increasing sequentially by 12% to 19,000 compared to the first quarter. Well over half of the shipments in the quarter continue to be driven by customers new to Tandem, and the source of these new customers remains almost evenly split between multiple daily injections and competitive conversions. We continue to see strength with renewal shipments, which have increased each quarter as a percentage of total shipments, reflecting a consistent capture rate on an increased number of warranty expirations. We have already renewed more than 60% of our 2022 expirations, with a pace to achieve 70% more quickly than years past, reflecting the high satisfaction and loyalty of our customer base. This puts our installed base of warranty customers in the U.S. at approximately 305,000, driving growth in our supply sales by 10% compared to the prior year. Turning to our operations outside the United States, we generated $53 million in sales in the second quarter, shipping 11,000 pumps and growing our installed base more than 20% year-over-year to nearly 135,000. We have now completed the transition to our European distribution center, which will support approximately 70% of our OUS sales going forward. We experienced approximately $2 million in sales headwinds in the second quarter related to the transition, mostly impacting supply sales. This operational implementation is very meaningful to the business, as it provides relief to our distributors from the supply chain challenges they were facing and allows them to react more quickly to fluctuations in demand. It also creates efficiencies within our own operations that provide better visibility into our true business growth, which will more closely align with our reported financial results. Our OUS sales year-to-date of $92 million were impacted by approximately $20 million in total headwinds associated with the scale-up of a new distribution center, with roughly two-thirds attributed to supply sales. Turning to margins, our gross margin was 52% of sales in the second quarter. This was an improvement of nearly two percentage points year-over-year. We have now consumed nearly all of the high-cost raw materials acquired in 2022, which was the single biggest contributor to our gross margin improvement year-over-year. The impact in the second quarter was much more modest than in previous quarters at less than 1% of sales, and we do not anticipate any material future impact. We also improved our gross margin by more than two percentage points from the first quarter. Comps increased to 51% of sales in the second quarter versus 49% in the first quarter, with this favorable product mix driving the majority of the gross margin improvement. We also outperformed adjusted EBITDA expectations, returning to profitability at 3% of sales in the second quarter. When excluding certain unique items in the first and second quarters, such as IP R&D and facilities consolidation charges, we improved our operating expenses by $3 million from the first quarter, effectively balancing investments in R&D and marketing against cost management efforts. In fact, R&D has been our greatest area of spending growth in recent quarters, as we have invested in driving and accelerating our product pipeline. The incremental operating cost from our Capillary Biomedical and AMS Medical acquisitions in support of this effort represented approximately 3% of sales in the quarter compared to no cost in the prior year. In all, we are proud that we met both our U.S. and OUS expectations for the first half of the year in this unique and challenging environment. The rapid waves of innovation that we will be introducing in the next few quarters position us well to drive an inflection in growth in 2024 and beyond. As John discussed, this comes with a greater level of unpredictability in the near term, as the timing of our new product launches may impact sales, as well as recognizing increased competitive noise worldwide. With reduced visibility and due to the year traditionally being back-end loaded from seasonality, we feel it is prudent to reset our sales guidance for the remainder of the year. We are confident that even with these unusual demand dynamics, at a minimum, we can achieve worldwide sales of $190 million in the third quarter and $785 million for the full year. For the U.S., one of the greatest variables is how the timing of Mobi availability affects customer purchasing decisions. Guidance reflects our confidence that, even with this uncertainty, our pump shipments in the back half of the year will be in line with the first half of 2023. This results in full-year combined supply sales of at least $575 million. Seasonality is still expected to positively influence our fourth quarter, with the expectation that it will represent the strongest quarter for pump shipments in the U.S., while Q3 is expected to step down modestly from Q2. Factoring in these dynamics, Q3 sales in the U.S. are expected to be at least $135 million. Outside the U.S., we are adjusting our full-year expectations to $210 million, with Q3 sales of at least $55 million. This reflects improvement in the second half of the year following full implementation of our distribution center in Europe and seasonality in the third quarter, balanced with a more conservative approach to the potential impact from competition. Drawing upon our experience in the U.S. last year, we think this aligns with our change to U.S. guidance and consider the uncertainty for some new entrants that we do not have as much experience selling against. As a result of these changes in sales expectations, we are revising our gross margin expectations to 51% for the full year. Also, we expect to remain adjusted EBITDA positive in the back half of the year, but we are revising our expectations for the full year to at least breakeven. This includes a revision to our recurring non-cash P&L charges, which are expected to be slightly lower at approximately $110 million, of which $95 million is associated with stock compensation and $15 million with depreciation. Considering this reset and our overall 2023 sales guidance, we feel it is also important to calibrate early for 2024. We will learn a great deal in the next six months that will better inform our thoughts on growth next year, particularly as we scale the launches of multiple new products. Until that time, we would like to set expectations for baseline 2024 sales growth starting at 10%, which implies more than $860 million off of our revised 2023 sales guidance, and we will continue to provide updates from there. We remain confident in our ability to achieve the goals we set a few years ago to reach 1 million customers, but are going to withdraw the timing of our longer-term targets for now as we evaluate the speed of uptake for these near-term product launches. Our goals for achieving 65% gross and 25% operating margins also remain unchanged and are largely correlated to the adoption of our Tandem Mobi and study set launches. To be clear, the actions we are taking today with guidance are to risk-reduce external expectations. Our connection and Tandem's ability to lead in diabetes management remains high, especially with the most comprehensive portfolio in our space. By doing so, we'll be executing on our mission to bring the benefits of Tandem's technology to hundreds of thousands more people living with diabetes worldwide. With that, I'd now like to ask the operator to open the call for questions.

Our first question comes from the line of Steve Lichtman of Oppenheimer & Company.

Yes. Sorry, I was on mute. I apologize. You mentioned Q2 coming in line with expectations. And as we think about what's embedded in the back half, what is assumed in terms of the upgrade program and potential benefit from that? And how does that get recognized if patients do take advantage of that program?

Sure. Thanks for the question, Steve. So the Tandem Choice program, for the rest of this year, you're going to see what looks much like what you've seen in quarters past, which is on a GAAP basis, we will make adjustments. And part of that adjustment is based on our estimate of how many people will take advantage of the program in the future. But there's still no election this year. So we won't have any change to that type of accounting. We'll still report our non-GAAP sales on the basis of our normalized pump shipments, which would be comparable to how we were reporting before the Tandem Choice program. And so when we thought about from a guidance perspective, we didn't particularly factor in that it would provide benefit or that it would offset any of the potential pausing. So at this point, the guidance was set with the baseline level in mind, off of which we think we can achieve or overachieve.

Understood. Regarding the second half of the year and your earlier comments on 2024, how are you incorporating the new CGM partnerships, including the new collaboration with Libre and the international launches planned for next year?

Sure. So first of all, I'll say that we're super excited about the opportunities that provides to us, and we believe that that will contribute to an inflection in growth in the future. At this time, with the limited visibility that we have in the market for the next two quarters as we work through these new dynamics, particularly with the Mobi launch and the timing of availability in the interim period. We're not factoring in any particular upside for those opportunities. And so that's something that we could look forward to as being an opportunity to overachieve our minimum guidance.

I think we also have two and a half quarters to basically see how these products perform, and that's going to inform us as we enter 2024 with a better understanding of what the growth rate might look like.

Our next question comes from the line of Matt Miksic of Barclays.

So I want to ask, it sounds like this quarter shaped up to be kind of very much almost spot on with kind of what you were expecting and what the Street was expecting. And I'm just wondering with the adjustments for those with the revenue adjustment. Is that your feeling that it came in kind of very much as you expected? And I'd love to just get whether that's your assessment? And then I have a quick follow-up on the Q3 and some of the drivers there.

Sure. Thanks for the question. So I would not only say second quarter, but first quarter, both came in line with our expectations from a sales perspective. And so we were well on track to achieving our goals for the year. But with the new dynamics of the Mobi launch, this change in the guidance is not so much about how we got to where we are today, but it's what we're looking at going forward. And it's just this limited visibility that we have to how much pressure that the anticipation of Mobi might cause in the market in the near term. And so we're just being very thoughtful about that and reducing the risk that was potentially in the back half of the year pretty substantially. And so back to thinking about this guidance level that we set as really a low point or minimum baseline.

That's great. Congratulations on the Mobi approval; it's nice to have that behind us and start discussing its market launch. Regarding the first half, it was in line with your baseline guidance, even when considering the effects of new product launches that may have caused some customers to wait or pause. Can you elaborate on how much of the initial impact of these launches is reflected in Q3? Or is your current guidance perspective that these launches won’t influence our numbers or guidance discussion until Q4? That clarity would be very helpful.

Yes, I think I understand the question. And so the way to think about the launch is the scaled approach that we're using is a measured launch across the months and the quarters. And so for third quarter, in particular, well, as I already said, we're not factoring in upside from any of the new opportunities. But there isn't going to be much happening in the third quarter. Then heavy marketing and availability will have increased by the end of this year. So as John said a few minutes ago, that gives us time to evaluate what's happening in the market to better understand the reaction to the new products that are starting right now versus people who might still be waiting for Mobi. And then we can give more color or clarity in a quarter or two and how those are trending.

Our next question comes from the line of Chris Pasquale of Nephron Research.

Leigh, I wanted to go back to the guidance adjustment and what you guys are factoring in today that you didn't have visibility on at the beginning of the year? Because if I go back and look, I mean, the timing of the Mobi approval seems pretty much in line with what you were assuming back when you first guided for '23. So why only now factor in this pause and why the big shift and how you think the back half of the year is going to play out?

One of the things we've been pleasantly surprised by is the excitement for Mobi. Since the FDA approval, we've had a couple of conferences, and the response has far exceeded our expectations. Talking to the sales force, two-thirds have indicated they experienced a pause in the second quarter. This situation is beyond what we anticipated. It makes it challenging to predict our revenue for the second half of the year due to both Mobi and the G7 and Libre pausing, along with some competitive dynamics. Consequently, instead of guessing, we're adopting a conservative approach to our guidance and aiming to manage public expectations. We have significant excitement and confidence in our current position and believe these new products will drive a strong 2024 for us. The positive news is that the only uncertainty we faced was with the FDA, and now that we have that clearance, we have complete control and are seeing impressive momentum within the company. These developments are occurring rapidly.

And then maybe I'll just piggyback on your comment about 2024. 2023 features significant headwinds on a couple of different fronts. The international distribution change, and now the anticipated pause in pump orders as people wait for Mobi to be available. So just from a math perspective, that would seem to make 2024 growth an above trend year, given the baseline. I don't think that you would frame 10% growth as above what you might expect the company to do long term. So help us understand why that's the right number even before factoring in the impact of things like the new CGM options, etc.?

Sure. We typically wouldn't provide any guidance for 2024 this early in the year. However, we believed it was crucial to manage expectations due to the changes we're implementing in our 2023 guidance. I would describe this as the initial baseline to consider for next year, prior to any new developments being available or contributing to our opportunities. We remain confident in the significant growth potential with these new products entering the market. However, we think we will have better visibility after observing their adoption over the next few quarters. The adjustment in 2023 is important for setting a clear starting point for understanding 2024 at this moment.

Our next question comes from the line of Matthew O'Brien of Piper Sandler.

This is Phil on for Matt. Just for starters, on the competition commentary, I was curious if you could parse that out a little bit further between perhaps the patch pumps on the market and the tube pumps. And as it relates to the recent 780G launch, has anything changed in your view on the launch of that product?

No, I don't think so. In the first half, we've experienced ongoing pressure, but things have stabilized, which is mainly in the past. I believe we performed quite well during that time despite the challenges. New devices are being introduced to the market now, and while we don't anticipate these will have as significant an impact as last year, there is always some turbulence when new products are released. We expect some modest turbulence, but it's not going to compare to last year's experience, and we believe we can navigate through it. The key factor in the latter half of this year will be Mobi, which will lead to some pauses; Mobi will be the primary driver of that. So, this reset is fundamentally about Mobi, although the other two devices entering the market will also have some effect, but Mobi is what truly matters.

That's helpful. And to that end, when we think about that pausing and looking towards '24, how are you thinking about the full market at least Mobi, how quickly will those patients waiting on those sidelines look to jump in? And I guess what I'm trying to get at is just overall cadence for that 2024 number you put out there.

Yes. As we mentioned in our prepared remarks, we plan to initiate an early access program in the early part of the fourth quarter, involving hundreds of users. We have a structured and cautious approach to our launch to ensure the system performs as anticipated. This strategy is in the best interest of the company and our patients. As we build confidence, we anticipate a more focused commercial launch in early 2024. Typically, we start gradually and ramp up as the year progresses. Meanwhile, we will focus heavily on training physicians and their staff, as well as on advertising and marketing to enhance our messaging. We expect to begin aggressively in 2024.

Our next question comes from the line of Matt Taylor of Jefferies.

I was hoping that you could put the pausing dynamics that you're expecting or forecasting here in context with other pauses that you've experienced or that competitors have experienced? Is it greater than or less than, if you can quantify it? And then I guess, if you're aggressively going to be launching in 2024, why wouldn't the baseline be more than 10%?

Sure. I'll provide two examples from the extremes regarding what we've observed. The first example is from 2016 when the 670G was approved, causing significant market disruption for several quarters. A similar situation occurred with Control-IQ in the fourth quarter of 2019 when we received approval. Even with marketing and understanding that it was a free software update, people still seemed to wait until it was available on the pump. These instances illustrate the difference between severe and moderate levels of market pausing. Mobi is particularly interesting; as John mentioned, we've noticed a lot of enthusiasm in the weeks following its approval, even without a strong marketing push. We're mindful of how this might affect the upcoming quarters. We hope the Tandem Choice program will provide customers with a pathway to make purchases now, but we can't be certain at this moment. Therefore, we're focusing on minimizing risk in our projections. We've clearly heard concerns that people doubt our numbers for the second half of the year. It seemed wise to do a complete reset to remove that risk and incorporate the potential impact of Mobi, which could lead to significant disruption in the next two quarters. We want to observe how things develop before making any further decisions, hence our current position.

And Matt, I would just add that the second half of the year is where we get the majority of our revenue, particularly in the fourth quarter, and the dynamic of just having a new device in the market and the sales force just out selling to deal with the deductible reset creates a variable, I think that we really haven't seen before. And something that does, in addition to having the new product, it's also the timing of it creates uncertainty as well.

Our next question comes from the line of Philippe Lamar of Citi.

It's actually Joanne from Citibank. The question that I have is multifold. Number one, what do you think the adjusted EBITDA will be in 2024?

So we're not giving that level of guidance at this time, but I will say that we expect improvement over 2023 as we continue to move through our profitability initiatives. And so I think we actually demonstrated very nicely from the first quarter to the second quarter our cost management efforts. And we'll continue to implement more efficiencies that will drive that additional opportunity as we go forward. Much of that comes from our customer service functions and how we continue to streamline, automate, and improve the way we interact with customers while still keeping their satisfaction levels in mind. So stay tuned on what that will look exactly in 2024, but we can expect improvement over this year.

Okay, I have two more questions, so please bear with me. Is there a chance that you will sell Mobi in the pharmacy channel? Also, when you initially put together the numbers, they were conservative, and there wasn't expected to be any upside from Mobi. Now, halfway through the year, those conservative numbers no longer seem conservative, and you're experiencing a downside from Mobi. Can you help me understand this?

Sure. I'll start first with the pharmacy question. We are certainly using that as an opportunity to introduce ourselves to the pharmacy channel. So while I believe we'll get some level of uptake there, it probably won't be material, and it won't be for quite some time as we build that capability. We're still very focused; in fact, our number one priority today is to make sure that lobes on all of our D&E contracts so we can move forward with the commercial launch unimpeded by that. And we're very comfortable with the timing, and that we'll be able to accomplish that. And so when we think about the original number, the biggest change where we are today is really the solidifying the timing of everything. And so while we had expectations for timing for clearance preparing, which we expected potentially in the first half with the back half launch. It's the good and the bad. The timing of when Mobi was approved made it very challenging for the back half of the year, and you have to think about the fact that Q4 being that you have seasonal periods with so many other activities going on, on top of our CGM launches at the same time. It's important for us to stage these launches appropriately. And as John explained on Mobi, it's even more important because this is a whole new form factor that we want to make sure that we have well tested and market-ready when we get to full commercial availability. And so what we did at the beginning of the year was to consider the level of excitement that would come with the Mobi approval, the exact timing of it, and how this would scale out amongst our other product launches. And so it creates a period of limited visibility. We have taken an approach of reducing the risk as much as possible in the numbers. We've heard loud and clear as to now that people struggle to believe our numbers in the back half anyway, and we thought it was prudent to just do a complete reset, take that risk off the table and factor in the level of impact Mobi could have, not to say that it will have, but there is the potential that it could cause significant disruption in the next two quarters. We want to see how that plays out before and make sure you and no one gets ahead of us at this point, and that's the basis for where we are today.

Our next question comes from the line of Travis Steed of Bank of America Securities.

This is Stephanie in for Travis. Could you provide more details on the EBITDA guidance for this year? I'm curious about the factors that determine breakeven for the year, especially with the revenue reset happening in the second half.

The only reason for the change in the EBITDA guidance at this point was strictly related to the change in sales expectations, which are interconnected. We still anticipate success in managing our costs. For now, you can expect our spending to be roughly the same as it is today for the latter half of the year. We won't hesitate to invest as needed to advance our R&D projects. Additionally, we will spend more on marketing as required to maintain and increase awareness of Tandem and our new products. With these considerations, we believe we can at least achieve a positive EBITDA.

Our next question comes from the line of Alex Nowak of Craig-Hallum.

Just a question around the cost improvements that we should expect with Mobi on the supply side. I think we know pretty well what the pump is going to come in; I think you said previously about 25% cheaper to manufacture. But what about on the cartridge side and just given the redesign there and perhaps on the infusion set side?

We expect the pump to scale up and achieve efficiencies within a year of its launch. In 2024, you will start to see improvements in gross margin. The manufacturing cost of the pump is expected to be 10% to 15% lower, while the cartridges should see a reduction of over 20% in manufacturing costs. However, the benefits from the cartridges may take longer to materialize as we need to build an installed base before experiencing the impact on gross margin. We anticipate that Mobi will become a larger part of our business, contributing significantly towards our 65% margin target, which you should begin to see next year.

Okay. Makes sense. And then I just want to clarify a question with regards to next year. As you launch Mobi, G7, Libre 3 integration in 2024, just what additional spending will you need to make? Or have the investments that you've done over the last three years, does that really put you into a nice position here to leverage those expenses next year as we get out of the pausing dynamic and we really start to see these new products ramp?

The way you can think about spending is much like you're seeing what's happening in the last quarter and what you'll expect to see going forward is that we'll continue to prioritize investments in R&D so we can move our product pipeline forward. And everyone is well aware of what we have in the pipe that's coming down the road. We also will not be shy about investing in our marketing activities to ensure we're getting broad reach and making sure our voice is loud and well heard, especially in the timing of these causing dynamics; we want to make sure people know what's coming next from us. But we do expect to have continued efficiencies. The beginnings of those you saw this quarter will continue in the years to come. Tandem Source, which you haven't spoken much about today but is one of our four products in launch right now, is a great facilitator. It's the new platform and infrastructure that allows us to create even greater efficiencies with our customer service functions. And so that's something that you'll continue to see year-over-year is improvement or reduction in that cost to serve.

Our next question comes from the line of Jayson Bedford of Raymond James.

Just questions on renewals. And I may have missed it, but I think last quarter you talked about the sequential move in U.S. renewals was similar to the sequential move in U.S. shipments. And so I guess, if I look at 2Q, you grew U.S. pumps here 12% sequentially. Is that a fair way to think about the sequential move in renewals in 2Q? And then just as a related question, in terms of the U.S. revision here, is there any way to parse out what's due to fewer new users versus a slowdown in renewals?

Sure. I'll start with, obviously, the first question. From a renewals perspective in the second quarter, I'm obviously very proud to say that we continue to get great traction there. And so from Q1 to Q2, just to be clear, we saw an increase both in new and renewal comps. The increase in renewals growing at a bit faster clip than the new pumpers, and we're capturing people at the same rates that we saw last year. So even before some of the challenges we saw in the back half of 2022, we were improving our renewal rates and continued that up until now. In fact, what we're seeing is we're capturing people, I would say, faster, so people are moving through the renewal cycle earlier than we have seen in years past. And that's great because not only for the rest of this year, we have a number of increased opportunities from renewals, as you think about 2024, it grows again from the 50,000 people in the U.S. we've sold pumps to 2, 4 years ago to more than 70,000 next year. So it's great to see this traction. The way we thought about the guide for the back half of the year is a little bit different because with Mobi, you've heard me say this over and over, and considering how. What impact it might have, we looked at the different drivers of our business. So competitive conversions, we look at MDI conversions, and we looked at renewals. And we considered the impact that Mobi may have on those three different populations. And we don't necessarily think it's the same across the board, but we did take what I would say is a healthy reduction across all three to factor in that regardless of where people are coming from, they may just wait for a Mobi to be available to them in general availability early next year. And so that's something that we took into consideration when we put together the guidance.

Please stand by for our next question, which comes from the line of Danielle Antalffy of UBS.

I wanted to ask about what you're seeing in the market, like from a market growth perspective, in the U.S. and internationally? And if any of this has to do with any change in underlying insulin pump adoption from your perspective? Or do you still think that is a call it, double-digit growth market here in the U.S.?

We currently have limited visibility on the overall market since we only have one quarter of data from everyone, and there are more numbers to come this quarter. Our Q2 results fell within our expectations, indicating that they align with what we anticipated. It's difficult to predict overall market growth at this moment, particularly in the U.S. However, the international market remains substantial and is still experiencing growth, with high demand for our products and no notable changes in market dynamics. Nevertheless, we are adopting a cautious approach as we consider the second half of the year, taking into account factors such as competition and new entrants, especially based on our experiences in the U.S.

Our next question comes from the line of Joshua Jennings of TD Cowen.

This is Ryan here for Josh. First, just a clarification. Can you address the inclusion or exclusion of U.S. Mobi in the 10% growth outlook you provided for 2024? I'm assuming it's included in that number, but just given the '23 guidance initially, I wanted to confirm that. And if I can, will there be any other new product launches in 2024 apart from U.S. Mobi?

So the way to think about 2024, which really, I would say, the first inflection comes from all the products that we are launching right now. So we're going to get a modest benefit in the remainder of 2023 based on the timing. And we'll learn a lot more about the opportunities they can drive for us next year. So I would say at this point, we believe we can get continued growth, thinking about that 10% level, but I would not put it in the outstanding category yet. And as we continue to evaluate the opportunities or the traction we get on the products in the next six months, it will inform us a great deal more about how to factor in those expectations for 2024. And so we do expect they will all be available, but we want to be cautious in the meantime and set a minimum for expectations just to make sure we're managing people and keeping them in the right place for now.

And Ryan, relative to 2024 product, I would just say that right now, we're really focused on getting these four products to market in 2023. And I think that as we and our fourth quarter call, we'll probably talk more about what to expect in the 2024 timeframe that's new.

Our next question comes from the line of Matthew Blackman of Stifel.

This is Colin on for Matt. In light of the rumblings you've heard from your OUS distributors, and I appreciate you've likely been asked about competition in various large markets, including the U.K. But taking a step back, can you give us a sense of the size and the growth of the U.K. pump market? And where do you think pump penetration at in the U.K. and these other large markets like France and Germany? You said 10% to 20% for EU broadly, but I assume that the U.K. may be closer to the U.S. in terms of penetration? Any color there would be really helpful.

Sure. So I'm not going to be able to provide a lot of color. We haven't given that level of detail and do not expect to be talking about any single market in terms of our OUS opportunity other than it's still a large market. In fact, the type 1 population where we operate is twice the size of the U.S. market. That's under-penetrated. We have talked broadly about an average or range of 10% to 20%; there are a few markets that are more similar to the U.S. in terms of penetration, but many or most, I would say, fall in the category that have a lot of room to run until they get anywhere near where the U.S. is today. And so we still think that is one of our greatest growth opportunities as we look forward.

A significant growth opportunity, which we intend to take advantage of. I mean, these products that we're bringing to the United States now certainly will be available in the OUS not-too-distant future.

Okay. Great. And I also wanted to ask one about the state of the U.S. commercial selling team in light of the current competitive environment, multiple new product launches. How are things progressing in the U.S.? And what’s your outlook for either rep count or kind of the sales team going forward in light of the multiple new product launches you’ve got late in the year and into 2024?

Well, I’d say they’re incredibly excited. They’re motivated. They are really looking forward to getting their hands on these products and just getting out and talking to the physicians and their staff about it. So I’d say it’s a very motivated team right now. I think that as far as headcount goes, we always evaluate that near the end of the year. We haven’t made any specific comments about it at this point in time. But we’ll look to the end of the year and see how we’re doing. And I think that it’s – again, I think that it’s a very positive environment. We haven’t seen any attrition, and the team, as I said, is very motivated, and we’re excited to get the product to market.

Thank you. As there appear to be no further questions in queue, that does conclude Tandem's 2023 second quarter earnings call. Thank you for participating. You may now disconnect.