Tandem Diabetes Care, Inc. ($TNDM)

Good day, and thank you for standing by. Welcome to the Tandem Diabetes Care First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 and Chief Administrative Officer. Ma'am, please go ahead.

Hello, and welcome to Tandem's First Quarter 2026 Earnings Call. Today's discussion will include forward-looking statements. These statements reflect management's expectations about future events, our product pipeline, development time lines and financial performance and operating plans and speak only as of today's date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements, which are described in our press release issued earlier today and under the Risk Factors portion of our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Today's discussion will also include references to both GAAP and non-GAAP financial measures. Unless otherwise noted, the financial metrics discussed today will be on a non-GAAP basis. Please refer to our earnings release issued earlier today and available on the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure and other information regarding our use of non-GAAP financial measures. John Sheridan, Tandem's President and CEO, will be leading today's call, and he'll be joined by Lee Vosseller, Executive Vice President and Chief Financial Officer. Following their prepared remarks, the operator will open up the call for questions. Thanks in advance for limiting yourself to one question before getting back into the queue. With that, I'll hand the call over to John.

Thanks, Susan, and welcome, everyone. In the first quarter of 2026, we delivered a strong financial and operational performance, setting the stage for another successful year. This momentum reflects the dedication of our team and our commitment to execute our strategic objectives. Building on these results, we actively advanced several key initiatives that position Tandem for both immediate impact and long-term growth. By modernizing our commercial operations, reshaping our business model and introducing new technologies, we are not only achieving notable short-term gains, but also laying the foundation for sustained growth, profitability and innovation. I'll now walk you through updates on each of these initiatives, beginning with the modernization of our commercial organization. Globally, we have assembled a talented and impressive team. The group is deeply committed to bringing the benefits of our technology to people living with diabetes, and we are working to further support them by strengthening our systems, infrastructure and processes. For example, in the United States, we continue upgrading our sales and customer management infrastructure as part of our multiyear system investment to optimize sales efficiency, enhance effectiveness and drive deeper customer insights. Internationally, a Q1 highlight was our launch of direct commercial operations in the U.K., Switzerland and Austria. By doing so, we are better positioned to serve our customers, strengthen HCP relationships and drive continued growth. The transition has been progressing smoothly, and we plan to continue expanding our direct operations later in 2026 and again in 2027. This approach deepens our engagement with the diabetes community while providing Tandem greater ASP and improved margins. The second key initiative I'll be discussing today is reshaping our U.S. business model through our transition to a multichannel strategy. On our last call, we discussed how adopting pay-as-you-go or PAYGO in the pharmacy channel provides us the opportunity to bring significant advantages to customers, health care providers and payers while delivering favorable economics to Tandem. Throughout March, we began executing contracts adapted for PayGo, covering both t:slim and Mobi pump supplies. We've continued to expand access with an increase to approximately 40% formulary coverage today. It's an important leading indicator for how quickly we can transition our business. Operationalizing PayGo in the pharmacy channel is an end-to-end change in the way health care providers prescribe our technology, the way we service customers and the way we process and fulfill orders, and we knew this transition would take time. It's still early in the process, and we are working to improve our efficiency and customer satisfaction by enhancing the pharmacy experience. Our early introduction of PayGo through the pharmacy reinforces our conviction in the meaningful opportunity this transition presents for our business and for our customers. Finally, I'll provide an update on our new technology across our portfolio. In March, we are excited to announce that Tandem Mobi, the world's smallest durable automated insulin delivery system, is fully available for use with Android smartphones in the U.S. By expanding to Android, we are bringing the benefits of Tandem Mobi to even more people living with diabetes, underscoring our commitment to delivering choice in diabetes technology. In the second quarter, we are on track to deliver on a number of exciting new offerings. In April, we received FDA clearance for use of Control-IQ+ in pregnant women with type 1. This is significant as it makes the t:slim X2 and Mobi, the first and only commercially available AID systems cleared for use during pregnancy in the U.S. We are also awaiting CE Mark for this indication in Europe. Pregnancy requires a much tighter glycemic range. This demonstrates that Control-IQ+ is designed to effectively support the unique therapy needs of pregnant women in addition to women considering pregnancy. We will be hosting a product theater highlighting pregnancy management with Control-IQ+ at the upcoming American Diabetes Association meeting in June. We are also preparing for the international launch of Abbott's FreeStyle Libre Free Plus integration with the t:slim starting in select European countries in Q2 and scaling to additional countries throughout the year. This integration with Abbott's latest generation sensor will allow even more CGM users to access the life-changing benefits of our Control-IQ technology. Additionally, in Q2, we will begin the commercial rollout of Tandem Mobi outside the United States. This brings together the best-in-class outcomes users have come to expect with Control-IQ+ and the benefits of Mobi's form factor. Rounding out our Q2 launches, we will be upgrading both t:slim and Mobi for compatibility with Dexcom's G7 15-day sensor, ensuring we continue to provide our customers with the latest generation technologies. It is also exciting because this software update will enable Tandem pumps to provide CGM data directly to our SugarMate app with future plans to add insulin data. This provides visibility to sensor information across our device platforms for users and their loved ones. These launches are designed to be global and deployable to all markets where the relevant system combinations are available, which represents an important accomplishment by our team. While progressing these new offerings to commercial availability, we also made great strides with our pipeline products. We're particularly excited about Mobi Tubeless, our novel infusion side option for the existing Mobi pumps that transforms it into a tubeless AID system, allowing for interchangeability between tubed and tubeless wear with one platform. This will be Tandem's first tubeless pump offering and the world's first with extended wear technology. We plan to file our 510(k) submission for the Mobi tubeless in the second quarter. Finally, we continue to make good progress preparing our pivotal study for Tandem's first fully closed loop system and remain on track to start it this year. As you can see, we continue to make meaningful progress across the business while demonstrating strong financial results, which Lee will now discuss.

Thanks, John. As a reminder, unless otherwise noted, the financial metrics discussed today will be on a non-GAAP basis. In this quarter's performance, we continued the momentum from last year by achieving new first quarter records for pump shipments and sales as well as robust margin improvement and solid cash generation. We are reaffirming our annual 2026 guidance as we continue to execute on our bold business model transformation in both the U.S. and international markets. We set new first quarter records with more than 29,000 pump shipments worldwide and $247 million in sales. Our U.S. performance drove this achievement where we shipped more than 19,000 pumps, representing approximately 10% year-over-year growth. Renewals continue to account for more than 50% of our shipments and new starts were predominantly MDI patients, representing roughly 2/3 of new customers. As John discussed, a key milestone in the quarter was our March launch of Paygo in the pharmacy channel. Throughout the month, we successfully increased our formulary access outside of the traditional cycles for PBMs and payers. Adoption was within our range of assumptions in these first few weeks. Fewer than 5% of customers ordered a pump through their pharmacy benefit. Similarly, less than 5% of our installed base purchased their supply through this channel. Our transition and pricing assumptions for the full year of 2026 remain unchanged. U.S. sales were $161 million, growing 7% year-over-year, also representing our highest first quarter U.S. sales. This reflects a headwind of approximately $1 million from the adoption of PAYGo as well as slight pressure in infusion set sales due to a key supplier shortages. Overall, pharmacy sales represented 6% of sales in the U.S., which was significant based on our volumes. Looking ahead to the second quarter, we're confident in our ability to deliver pump shipment growth with a seasonal curve similar to 2025 and expect U.S. sales of approximately $175 million. This factors in an increasing PGO headwind, of which the magnitude will depend on our pace of execution. Turning to our international performance. We shipped more than 10,000 pumps and are executing well on our go-direct strategy. International sales totaled $86 million, representing 3% growth year-over-year. Direct channel sales increased to approximately 11% of total international sales from less than 5% historically. This is the highest international sales quarter in our history due in part to favorable currency dynamics. Also as a reminder, the first quarter of 2025 included a $5 million benefit from timing of distributor orders creating a tougher point of comparison. Our international business had a few puts and takes during the quarter compared to our original assumptions, including a delay in timing of expected headwinds from going direct, a onetime benefit in Switzerland related to the buyout of existing customer rental contracts from our former distributor and the same infusion set shortage I referenced in the U.S. In the second quarter, we expect that international sales will be approximately $80 million. This steps down from the first quarter due in part to the delayed impact of $3 million to $4 million headwinds associated with our go-direct transition. This also incorporates expected order phasing tied to Mobi availability as we scale launch with some distributor demand shifting into the third quarter. Turning to margins. Gross margin for the quarter exceeded expectations at 55%, an improvement of nearly 5 percentage points year-over-year and the highest first quarter gross margin in company history. Notably, we started the year higher than our full year 2025 average, reflecting continued execution on our key drivers, including pricing discipline and product cost improvements. Both operating and adjusted EBITDA margins reflect a meaningful improvement year-over-year due largely to $75 million IP R&D costs in the prior year. Beyond that charge, we demonstrated leverage as operating expenses of $154 million remained essentially flat year-over-year. This included a slight reduction in R&D spending that offset increased commercial investments in support of global growth initiatives. As a result, adjusted EBITDA was approximately 1% of sales, an improvement of 32 percentage points based on the IP R&D charge alone and an additional 3 points of operating leverage. Operating margin improved even more substantially by 40 points to negative 7% of sales. This was due largely to a reduction of stock-based compensation expense from 11% of sales in the first quarter of 2025 to 6% this quarter. With our focus on cost discipline and achieving our profitability goals, we generated $5 million in free cash flow this quarter. We also completed a convertible debt financing in February, yielding net proceeds of $276 million with 0% interest to further strengthen our balance sheet and provide flexibility as we execute against our strategic priorities. As a result, we ended the quarter with $570 million in total cash and investments. Overall, we remain confident in our ability to deliver on our goals for 2026 and are reaffirming our 2026 financial guidance. Worldwide sales are expected to be in the range of $1.065 billion to $1.085 billion. This includes U.S. sales in the range of $730 million to $745 million and international sales in the range of $335 million to $340 million. For the second quarter, worldwide sales are expected to be approximately $255 million. We expect gross margins of 56% to 57% and adjusted EBITDA of 5% to 6% for the year. Second quarter margins are expected to remain consistent with the first quarter. Further details on our guidance and assumptions for the year can be found in the earnings call slide deck posted in the Investor Center portion of our website. With that, I'll turn the call back to you, John.

Thanks, Lee. Before I wrap up our prepared remarks, I'd like to extend my thanks to the full Tandem team. Your unwavering dedication, commitment to innovation and teamwork have been the driving force behind our achievements. I also appreciate your resolve as we continue to navigate shortages from our infusion set supplier. And while they may only impact a small percentage of our customers, the impact on them and the health care providers is significant. I appreciate the extra care and service that you are providing during this time. Thank you, everyone, for all you do. In conclusion, we are encouraged by the start to the year and are confident in our strategic direction that we have set. Our operational and commercial goals are firmly in focus, and we are committed to providing best-in-class technology to our customers in a more efficient and cost-effective way, while advancing our global business model and driving meaningful long-term value for our shareholders. Thank you again for joining us today. We are excited about our opportunities ahead and look forward to sharing our progress in the upcoming quarters.

[Operator Instructions] Our first question is going to come from the line of Matt Misk with Barclays.

Congrats on a really solid quarter here. I appreciate all the color and exciting to see kind of turn the corner here into Paygo. So I had one question on just as I'm sure you noticed one of the other companies in the space talked a little bit about the market, some tone or, I don't know, seasonal, I don't know what it was exactly, but maybe sounded like some slowness, some temporary slowness. So great to get your perspective on that, what you've seen? And then also just any way that you would characterize the major drivers of the growth in the quarter, whether it's uptake in type 2, whether it's uptake through pharmacy, whether it's new sensor integrations, I hate the all of the above answer, but anything you can do to kind of give us a sense of what were the major drivers for the quarter?

Matt, I'll start off and talk a little bit about the market and whether it's growing or not. I mean I think it's still large and very underpenetrated. It's great to have type 2 as part of the market for us now. We're excited about the fact that we're bringing a great deal of new technology and business model changes that we believe will really help us grow new starts from MDI. I think that if you look back in 2025, there is a number of pump companies in the market. I think they all did pretty well. And I would say it definitely appears to us that the market is growing. And we are -- like as I said, we're very excited about this year, in particular, because we have so much technology and business model modifications that are really going to position us for growth this year and beyond. And I'll let Lee answer some of the questions about seasonality.

Sure. I'll just say that we didn't see anything, I would say, unusual or different from what we typically see in the DME space starting off the year. Our pump shipments came in line with where we expected, which was about a 30% sequential decline in the U.S. from the fourth quarter. So nothing really to note there. And then -- and unfortunately or fortunately, the answer to your question about the major drivers is it really is a little bit of all of the above. We have a lot of things, as John suggested, working in our favor this year with our new product launches, our business model transformations. And I would say, as we start to gain traction, everything is coming together to drive us towards a very successful and strong growth year altogether.

Our next question will come from the line of Chris Pasquale with Nephron Research.

I was hoping you could dig in a little bit on the international business. International pump revenue was up despite pump shipments in that segment being down. You talked about a couple of onetime items. So were those two things related? And could you maybe quantify some of the one-timers that you had this quarter, just so we can think about the go-forward run rate?

Sure. So you're right, there were a lot of moving parts internationally, and it varies the answer depending on if you're comparing to last year, comparing to expectations, but I'll touch on a few of those. And so -- when you look year-over-year, a significant part of the growth was coming from currency fluctuations. So there was favorability in the environment that helped that growth year-over-year. When you look at also last year, first quarter and second quarter in the first quarter is a little bit tougher comparison for us because last year, there was a shift in timing of sales. It was more favorable about $5 million in the first quarter versus the second quarter. So as we go into Q2, it will be an easier comparison for us. And within the quarter, compared to when we set our guidance expectations, there were also a few moving parts. And one was just simply that we had estimated a headwind of approximately $5 million for going direct in certain international markets. And we're seeing a bit of a timing difference there. So we've realized about $1 million of that, and we expect $3 million to $4 million to push into the second quarter. Also, we did have some favorability in our Swiss market, just a onetime, I would say, accounting benefit that we had, which was largely offset by some of the infusion set noise that we saw as we're managing through some of these shortages we're seeing in the quarter. So I think that it's a lot, but maybe the underlying comment I should make is that overall, we're very excited about the international operations. We still see strong demand in the market for our products. And in the markets where we've gone direct, we're already hearing a very positive reception to us in the market as we're closer now to the physicians and the patients.

Our next question will come from the line of Matthew O'Brien with Piper Sandler.

On Tobii, I know filing here in Q2, still nothing expected for revenue here this year in '26? And then if you do get the approval late this year, is it fair to think you don't want to disrupt what's typically a generally stronger DME part of the year, so more so bigger launch next year in '27. So no real disruption from launching Tobi or as people are expecting Tobi, I just don't want an air pocket in any of the quarters as people are waiting for that system.

Thanks, Matt. Yes. I mean I think that when it comes to our submission, we're on track to submit it this quarter. We also plan on getting clearance in the second half. There's some uncertainty with the FDA, but they've been doing a really nice job lately in getting things done quickly. And as you know, when it comes to guidance, we typically don't include new products yet until they're actually in the market. When it does come, let's just say we get the clearance in the second half, we have a phased commercialization process where we actually -- we observe the product in small groups of people first, increase the size of the group of people using it and then get to the point where we feel we've uncovered or found nothing that we would want to make sure that we fix before it actually gets into full commercial launch. This is just a practice that we've used from the very beginning. And while we do an excellent job of testing these products, you really can't find everything until you use it over time with the large groups of people. So we'll go through that process. And I think that will it depends on the timing. I think that if we can get it to the market before the fourth quarter starts, I think we'd want to do that. But we'll have to wait and see when the actual approval or the clearance occurs.

Our next question is going to come from the line of Mike Kratky with Leerink Partners.

Congrats on a great quarter. It looked like U.S. sales through the pharmacy maybe ticked down slightly from 7% in the fourth quarter to 6% in the first quarter. So can you just talk a little bit about how that lined up with your expectations? What factors contributed to that? And what you've seen so far this quarter to support your confidence in the 15% for the year?

Sure. Great question. So I think most importantly, starting off is you really can't compare our pharmacy experience this year in 2026 to what we saw in 2025. It's a whole different world with the change in the business model that we have going on. For example, last year, our pharmacy contracts included reimbursement for the pump that was a premium to even what we get in DME. So it's a very different environment. As we came into this year, the first quarter, we've had 2 major work streams that we're focused on. One is building up the coverage. And so we were pleased to be able to report that we're already at approximately 40% formulary coverage, and we expect that we can still increase that across the year as we look forward to the end of the year. The other piece of it was the operational piece, and that was implementing an end-to-end change in our workflows. And so it changed everything is how physicians prescribe, how we engage with the patients, how we process and fulfill orders. And so that's what we've been focused on the execution of that piece. And it really all started late in the first quarter in the last few weeks of it. And so we're at the very early stages of it. And so far, we're excited about the opportunity it presents. Nothing's changed our conviction in our ability to grow and scale that across the year. And so we look forward to future quarters when actually we can report the headwinds that are coming from the volumes that we're bringing through.

Our next question will come from the line of David Roman with Goldman Sachs.

This is Phil on for David. I think maybe touch on pricing. So I saw on the slides that it was reiterated, and I think I heard in your comments as well, Lee, we heard from a competitor yesterday that so far, it sounds like everybody is acting rationally or fairly, I think, maybe was the term they used. Can you talk about how negotiations around pricing have gone so far? And what is baked into that 350 number expectation for the year? What level of conservatism is in there?

Sure. Happy to talk about that. I would agree, I would say that we're all behaving rationally when it comes to pricing. We are excited to be in this market and take advantage of the pricing opportunity that was already set in the pharmacy channel for insulin pump products. And when we thought about how to set expectations for the year, I would call them more modeling assumptions right now because it is new for us, and it's an early experience. And so what we said was to expect about $350 per month per patient as they order supplies. And what's factored into that would be there's an array of contracts that were entered into with varying rebate structures in them. And at this point, we don't have enough experience to say what that mix will look like on a sustainable basis. And so that's the baseline that we've set for now. It's still the right way to think about it. And as we start delivering on more volumes and gain more traction and experience, we'll be able to update those assumptions in the future.

Our next question is going to come from the line of Richard Noder with Truist Securities.

It's Ravi on for Rich. So just 2 for me, and I guess I'll ask them both upfront. Just first on the infusion set shortage, would you mind quantifying that and -- or maybe suggesting what the impact might be in 2Q? Because it looks like you're kind of guiding a little bit below consensus here, but reiterating the -- for 2Q, but reiterating the full year guide. So just curious if there's any impact from that there? And then second, just on the sales force expansion, this is -- seems to be a theme now running across your peers and I guess, Tandem now itself. Can you maybe talk about what the opportunity is that the sales force is going to be going after and maybe what patient population it can unlock?

Well let me just talk a little bit about the situation with infusion sets and Lee can talk about guidance. First of all, I'll say that it's unfortunate and our supplier has had some capacity challenges that actually began in the fourth quarter that continue to pressure us in the first quarter. And this is both in the U.S. and internationally. We've been working very closely with them. I think we practically have daily calls with them, the operational team as well as the executive team. And it's a top priority for us. I would say that when you actually look at the impact, it's only a small number of SKUs that are really subject to the capacity shortages. But the unfortunate part about it is for those people who are impacted and the HCPs who support them, it's really significant. And we're doing everything we can to be creative. We're looking for options in terms of lengths, colors, you name it, to see if we can provide intermediate solutions until this is taken care of. And we're also looking at managing inventory to do everything we can to provide as broad a coverage as possible. But I will say, unfortunately, that this is something that probably won't be resolved for a quarter or 2. I think we expect to see some progress in the second half of the year, but that's what we're dealing with right now. As I said, we're taking it very seriously.

From the perspective of the impact, all we're sharing is that it was a modest impact in the quarter, both U.S. and internationally. And we factored that same level of impact as we set the expectations for the second quarter. And so as John said, we're managing it very closely. We're working through it. And so we see a line of sight to the end of this in the long term.

Our next question will come from the line of Jeff Johnson with Baird.

Lee, I guess I'll follow up just on the comment you made there on the infusion set impact. I know you're not quantifying it. But let me go after it this way. You missed -- supplies missed our model by about $11 million this quarter, very well could be that we're just bad modelers. I've been told that before. I'll probably be told that many times in the future. But if our models -- or if you missed our model by $11 million, does a lot of that get attributed to the shortfall? And is that also -- it sounds like you're assuming a similar shortfall in 2Q, even though you are trying to, I think, on some of the true steals move patients over to other infusion sets. I guess I'm just trying to understand, does the year-over-year impact stay the same in Q2 as it was in Q1? And am I anywhere near ballpark based on my model points?

Great. Thanks for the question, Joe. I would say that is a bit on the high side for the impact of this. It was -- I put it more modest than that. And if you think about it, there's a couple of ways to think about the size of this. So first of all, there's back order situation. But also to John's point, some of the ways we're helping to solve the problem for patients is offering an alternative. And so just because we have some back order situation, it doesn't mean that we haven't recovered sales in other ways in order to satisfy patient needs. And so it's not near that big. It's something that we expect to be a bit disruptive again in the second quarter, but it's something that we can work through. And we'll continue to talk more and maybe more about the modeling assumptions in the supply sales, maybe it's a little bit of price or other pieces of it that are not working there.

And our next question is going to come from the line of Matthew Taylor with Jefferies.

This is Matt on for Matt Taylor. I wanted to ask a little bit on kind of product expansion. First one on your clearance for type 1 pregnant women. And then the second one on the second one, actually, you kind of answered that one, but sticking with pregnant women, can you help us maybe frame the size of that opportunity and how incremental that could be? And then maybe a third one on adding Android capability. Is there any analog we can look at for thinking how that adds any sort of incremental growth in the coming quarters?

Well, first of all, we're very excited to have received pregnancy clearance in actually just a few days ago. And it was based on data from CURCUIT trial that was published in JAMA recently. I'm happy to say we're the first and only AID system approved for pregnancy in the U.S. for both Mobi and t:slim using Control-IQ. And we also expect CE Mark here this quarter. If you look at the clinical data, the control group, the Control-IQ group experienced a 12.5% improvement in a tighter range of 63 to 140 milligrams per deciliter, and that's about 3 more hours a day, and it was for the length of the pregnancy. So really substantial improvement and a great performance by the system. When it comes to the size, I would say that it's obviously pregnant women, but it's also women considering pregnancy. So I think that it's not a really large group of people. I don't think I can put a number on at this point in time, but it's a meaningful and important group of people, and we're very happy to have this. We're now in the midst of kicking off training and events for HCPs. And as I think I mentioned in the remarks that we do plan to have a symposium at the A DA. Just real quickly, relative to Android, we have a number of people that wanted to use Android and iOS applications on our mobile apps on t:slim. And I would say roughly 60% of those use iOS. And so Android represents a big opportunity for us. I have friends who use our product and have been waiting for Android to become available. So it's meaningful. It's another great opportunity for us to just drive MDI growth in 2026 and beyond. So it's a meaningful addition to the portfolio.

[Operator Instructions] And our next question will come from the line of Joanna Wuensch with Citi.

Sticking with the one question rule. With Tobi being submitted in the second quarter to the FDA and on track for second half approval and assuming there's nothing in your guidance for -- how do we think about kicking off 2027 launching that product? And how are you preparing for it?

I think for launching the product, as I mentioned, we have a phased commercial process to release it. We're hoping that we actually get it on the market this year. But I think that when it comes, we'll have to see what the timing looks like. When you think about when you think about the market today, there really is a tube market and a tubeless market. And the tube market is growing maybe single digits, low single digits, whereas the tubeless market is growing in double digits in the 20% range. And so a significant opportunity. And I think that when you look at the competition that's out there today, we're in the pharmacy now. We're going to have a tubeless device. And I would say we feel like we have a better algorithm. And so I think that there's a big opportunity for us to do 2 things. One, I think we're going to drive MDI conversions to our device. And at the same time, I think there's potential for competitive conversions. So I think that's -- unless you want to add anything, but that's pretty much what I would describe. It's a big opportunity for us. We recognize that, and we're really excited about it.

Our next question will come from the line of Suraj Kalia with Oppenheimer.

[Technical Difficulty] John, I'm going to cheat and sneak in a 2-parter, if I could. To Joanne's question, John, how would you define the low-hanging fruit for 7-day Tobii? Would there be a price differential? And Lee, if I could quickly, U.S. sales were up 5%, pump units up were roughly 12%. And then obviously, there's a 6% PBM contribution. Can you help us thread the needle here?

I think the financial benefit, Suraj, is the fact that the infusion plate last 7 days, whereas an infusion set lasts 3 today. And so there's a margin benefit from having that extended time. It's also a substantial customer experience improvement and that they don't have to change the product as frequently. So I think that all this stuff adds up, and we're doing everything we can to get gross margin up. So this is certainly a help in that. But I think the real benefit here is customer experience, and that's where our focus is.

And to your question on the first quarter in the U.S. And so when you look at pump shipments, you're seeing it on a rounded basis, the actual growth rate was 10%. So the spread between the growth rate on shipments and the sales growth is not as substantial as it might seem on the surface. So it really is just pricing that's the differential.

Our next question will come from the line of Larry Biegelsen with Wells Fargo.

So Lee, I'll ask the new start question. By my math, it looks like new starts were down slightly year-over-year in Q1 and down modestly sequentially by our math. Is that right? And do you still expect new starts in the U.S. to grow in 2026?

Sure. Thanks, Larry. So yes, new starts were -- your math is accurate when we look at it year-over-year and even down sequentially, mostly due to just the regular seasonal impact that we see. And this was how we had structured the year in terms of our own modeling assumptions that we would continue to see that slight decline in the first quarter, but we would return to growth as we look ahead. And we are very convicted in the ability to return to growth because we've been seeing improvement over the last few quarters from our low middle of last year. And it's really the traction we're seeing on our new product launches. And then we look forward to pharmacy making a real difference there, too. Now that we've removed that cost barrier, more and more people can move to pump therapy without having to worry about an upfront cost. And so as we continue to build on that initiative and drive these new product launches, we do expect to see that return to growth this year.

Our next question will come from the line of Michael Polark with Wolfe Research.

I'm interested in learning about the process to convert someone in the base to pick up supplies at pharmacy. So I get the incentive for a new user with no upfront. But for that compliant happy user through DME, how do you get them to the pharmacy? What does the outreach from you to them look like? What is the outreach from you to a physician look like? And can you remind me for the -- on the financial incentive, how different is patient out-of-pocket for supplies only in the DME versus pharmacy?

Sure. I'm glad you asked. It's a really good question because I think there might be an assumption that it would be easy just to move people over, but there is work involved to that point. And so first and foremost, when a customer comes in to place their quarterly order, which is usually quarterly, I should highlight, mostly not monthly, but we will check their benefit to see if we have coverage for them on formulary. And then we'll share with them the out-of-pocket benefits. And that's the true motivator for them is the out-of-pocket is typically lower or with co-pay assistance, we can make it be lower, if nothing else. And so once we get them understanding and ready to move forward, it does require a new prescription. So that requires reaching out to the physician to get them involved to have them write the prescription. And so getting their attention and time to focus on that. In some cases, they want to focus on customers who haven't yet moved to pump therapy, but it's a process. And so that's something that we're working on, and it is one of the key drivers as we look ahead to really maximize this pharmacy opportunity. It's not only bringing more patients to Tandem, but it is converting that existing base we have because if you think about the multiples you see when you move -- if you could easily move 300,000 people and get that price benefit, that makes a significant difference on our revenue growth and our margins. And so it is one of the activities we're very much focused on.

Our next question will come from the line of Priya Sachdeva with UBS.

So much for the question. Really nice to see the cash flow generation in the quarter. So in Q1, which has typically been a heavy cash burn quarter for you guys, would love to maybe hear about what changed this quarter and then how sustainable is this level of cash generation going forward?

Sure. Thanks, Priya. So I mean, a lot of this comes from the cost discipline that we have. So while we're focused on growing revenue, we're also equally focused on driving improved margins. And this year, we demonstrated a 1% positive EBITDA in the first quarter, and I believe that's the first time we've done that since 2022. To your point, Q1 is a tougher quarter because of the seasonal dynamics in our business. And so it's really meaningful to us that we were able to show positive EBITDA and the cash flow generation. So I appreciate that you noticed that.

And our next question is going to come from the line of Jayson Bedford with Raymond James & Associates.

This is Elaine on for Jason. I had a question on the gross margin and how you're thinking about the cadence for the year. You gave us guidance for 2Q and 4Q, and we can get to an implied 3Q. So my question would be, why would it stay relatively flat for the first 3 quarters, always according to my math. And when we think about the year-over-year expansion, how much of it is driven by Mobi scaling versus the pharma transition?

Sure. Thanks, Elaine. So it's a great question. First, I'll start with the Q1 to Q2 being relatively flat. A little bit of that is really just product mix. When you look at our where revenue will go from Q1 to Q2, both U.S. and internationally, more of that step-up is coming from supplies. And globally, even though supplies are going to have a better gross margin eventually in the U.S. with our new reimbursement model in pharmacy, today, supplies will we still have a lower gross margin than pumps. So it's really just reflective of the product mix going into the second quarter. And then it should start to step up from there, scaling towards that 60% in the fourth quarter, and that will come from our pricing benefit that we expect both with our direct operations outside the U.S. continuing to build and with the pharmacy benefit that can come from converting more customers to that -- in the supply base to pharmacy in the U.S. And so I would say this year, price will be a very prominent driver of gross margin, but we are continuing to see benefit from Mobi as it's scaling in volumes for pumps. We started seeing that benefit in 2025 as we were building more for supplies with Mobi. We're really going to start to see that difference this year. So that will be a contributor to the gross margin improvement across the year.

Our next question is going to come from the line of John Block with Stifel.

Great guys. Maybe I'll just follow up on an earlier international question. Just when I look at that international pump ASP, the actual ASP seemed to step up really nicely from recent quarters. And so just Lee, any color how much is FX? How much is the direct transition? Does this even trend higher from the current 1Q result just as that business -- or at least pardon me, the business percent that is direct continues to increase? And maybe most importantly, any way to think about, call it, like an exit '26 pump ASP as we head into the following year?

Sure. So I will start by saying the assumption that we've made in guidance for the year is that pump ASPs outside the U.S. with these changes with going direct should land somewhere in the $2,800 to $2,900 range. We did see, I'm going to say, extra benefit in the first quarter because of this onetime accounting benefit we got in the Switzerland market. We were able to recognize the level of revenue there because of the acquisition of certain customer rental contracts that were already in existence from our distributor. So this onetime benefit is what really drove the incremental pump ASP in the first quarter. Otherwise, it should settle into that $2,800 to $2,900 range for the rest of the year.

And our next question is going to come from the line of Anthony Petrone with Mizuho Financial Group.

Maybe on the U.S. side, competitor had a recall announcement. FDA came out in April, sort of reported more adverse events on one of the primary competitors. Just wondering what the chatter is out there. Is that creating any opportunities just for share capture and certainly, as you look to Mobi or even otherwise. So just a little bit on the competitive dynamics in the quarter. And then in terms of the follow-up on spend as you get ready for the Mobi launch, just thinking a little bit on the DTC end of things. Is there a big DTC campaign that's planned around Mobi tubeless?

Well, regarding recalls, it's unfortunate, but that's one of the things that happens in this marketplace. And the real intent of the recall is to be sure that the diabetes community is aware of safety issues that might impact the use of their products. And I would say it's something that happens to everybody. And when we have it happen, we do our very best to ensure that patients are safe and they understand the risk. So I don't think that's going to give us -- there's no benefit that's going to come from that. You don't like to see it happen and -- but you recognize that as part of dealing in a market that has life-saving technology. When it comes to competition in general, I would just say it's a large and expanding underpenetrated market with new entrants. I would say Q1 was consistent with our expectations. It's a very highly competitive market, but there's nothing really specific to point to that changed. I'll also say that we are very confident in our ability to deliver new technology to the market. I think the team has done an amazing job in the last several quarters, and we continue to do it this quarter and in the second half of this year. And I think it's going to really impact the business when it comes competitively. And as well as we're now moving to the pharmacy benefit where the out-of-pocket is substantially lower, and that's going to be a big benefit. So I think that we feel very good about where we're headed competitively. But specifically to the marketplace today, I don't think it's very competitive, but nothing has really changed.

Our next question is going to come from the line of Matthew Blackman with TD Cowen.

[Technical difficulty] Lee, I think I heard you say 40% formulary coverage to date. I guess I'm just trying to figure out sort of the proper context. I mean that seems like a lot of progress to date. We're just 1.5 quarters deep in the year. But I really don't know how to frame that relative to where you need to be at the end of the year to sort of hit your goals. So could you frame that relative to your expectations where you hope to exit the year? Is the next sort of whatever percent, let's call it, 60% heavier lift? Just any sort of framework to think about where you are to date and where you need to be by the end of the year to hit some of these goals for pharmacy mix, et cetera?

Okay. Great. Happy to put some context around that. So first of all, I think what's important to understand is typically, new formulary additions happen on January 1 or July 1 cycle. And so we're very excited that we've been able to add this coverage across the quarter. So we're a bit off cycle here. I mean it shows, first of all, the receptivity to us moving to this pay reimbursement model and then also the acceptance of our products within the channel. And so the team isn't stopping. I mean I feel like when I look at my e-mail, I see announcements every week that show another formulary addition, some bigger than smaller than others. But still, the team is working hard and working to drive that up across the year. In order to achieve our goals for pharmacy this year, we're right on pace with where we need to be. I'm not going to share a specific goal, but I think we're very well positioned to drive the pharmacy access in order to hit the targets that we've set out.

And our next question will come from the line of Bill Plovanic with Canaccord Genuity.

Zach on for Bill. So as for the type 2 ramp, can you give more context as to how that's going? You've talked about in the past difficulties you have with the C-peptide testing requirements. Can you just give us an update on what's happening there?

Sure. Well, first of all, we're really excited about type 2. It's a big opportunity and not unlike -- it's even less penetrated than the type 1 market U.S. and internationally. And really, our focus is on market development at this point in time. I'm not going to talk specifically about numbers today. We really want to see sustained trends before we report numbers. And so that's -- we're going to wait a little while, but it's early for us. That being said, there's many positive sources of growth that are happening right now in type 2 and in the near future. We expect tailwinds from FreeSalLivery 3 from Mobi Android, Mobi Tubeless pharmacy. Those are all great. We do anticipate positive news from Medicare access, and we think they're going to get rid of the peptide requirement, but we'll have to wait and see. And as far as the company goes, right now, we're focused on just creating awareness clinically and on the product benefits, but big market underpenetrated. We've got a lot of positive things going on. We're excited about it. And we do anticipate seeing growth in type 2 starts, MDI starts this year.

And our next question is going to come from the line of Travis Steed with Bank of America.

Maybe focus on that March 26 where you're kind of moving the Paygo into the pharmacy. Just help us understand how that went? How is the trend? Are you seeing kind of increasing ability to kind of ramp into April and May? And the 40% coverage that you got, how much of that is kind of Tier 1 at this stage?

Sure. I'll answer the first part of the question, Travis. I mean, first of all, our early experience really does reinforce our conviction that this is a great opportunity for us for the business and for our customers. So we're moving forward aggressively. It's our top priority. As Lee mentioned, when operationalizing pharmacy is -- there's a lot going on there. It's a change to the physicians' processes. the way we service our customers and how we process and fulfill orders. I would say that right now, we're working to improve the experience. There's certainly some -- there's behavioral change that we have to work with. There's learning curve, there's efficiency opportunities. And these are things that we're very focused on right now. But also we have a strong team, and we're making good progress. And so I think it starts off slow and will gradually increase as we get through the year. And again, this will be a meaningful part of our business certainly by the end of this year and as we move into 2027.

And then just a quick comment on your question about tiering. We have a variety of our contracts where we're on different tiers. And the real difference that it makes to us at least is the amount of rebate that you pay in the various tiers. And then the influence that has on the patient out of pocket and the amount of co-pay assistance that we might have to use. And so we're not sharing any breakdown of any of our contracts in particular, but we are on Tier 1 and S Tier 2 and Sun Tier 3 and some. So it does vary across the board.

Our next question comes from the line of Shagun Singh with RBC Capital Markets.

I just had a quick question on Mobi Tubeless, and I apologize if it's been asked already. Can you maybe talk about how you think about the mix between the different products that you will be selling with Mobi Tubeless coming on board? How we should think about pricing? How do you expect to compete with the current patch pump form factor more from MDIs or competitive share gains? And then just anything you can share on the go-to-market strategy that you haven't already discussed?

Shagun, the first thing I think that's important here is that we already have 325,000 customers in the U.S., a significant portion of those use the pump today already. And this is an infusion set option for them to choose. And so we think there's probably going to be pretty good conversion amongst those people. I think people are going to try it out first, tried both ways out and see what they like. And I think that the other aspect is certainly when it comes to new starts, now that we have a tubeless product in the market, we expect to see -- we're going to benefit from the fact that tubeless is very important to people. It's a form factor that they want, and we expect to see a lot of progress there. Leigh, do you want to add anything to that?

Just to your question on pricing, to John's point, with being the Mobi pump, it's the same pump hardware regardless of which infusion set they choose. And then when it comes to pricing, we're pricing -- we never only discussed our we haven't discredit our approach yet, except that for now, you can think about as a similarly priced to supplies.

Yes. But it's a supply pricing issue. It's the same pm, obviously, same price for the par.

Thank you. This will conclude today's question-and-answer session. Ladies and gentlemen, this will also conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.