Tactile Systems Technology, Inc. 

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(NASDAQ:TCMD)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2018 Earnings Conference Call for Tactile Medical.

At this time, all participants have been placed in a listen-only mode. At the end of the Company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and that the recording will be available on the Company's website for replay shortly.

Before we begin I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated including those identified in the Risk Factors section of our most recent annual report on Form 10-K filed today with the Securities and Exchange Commission as well as our most recent 10-Q filing.

Such factors may be updated from time to time in our filings with the SEC which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information future events and otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Jerry Mattys, Tactile Medical's Chief Executive Officer. Please go ahead sir.

Gerald R. Mattys -- Chief Executive Officer and Director

Thank you, operator. Good afternoon, and welcome everyone to our fourth quarter and full year 2018 earnings call. I'm joined on the call today by our Chief Financial Officer Brent Moen.

Let me provide you with a brief outline of today's call. I'll begin my prepared remarks with a review of our financial performance highlights for the full year 2018, during which, I'll also discuss the primary drivers of our revenue performance. Then I'll turn to a discussion of our 2018 operating highlights, including the commercialization of our new products Flexitouch Plus and Flexitouch Head and Neck, and our strategic transaction with Sun Scientific and Wright Therapy Products.

Following this discussion I'll walk you through our financial performance during the fourth quarter before turning it over to Brent for a detailed review of our financial results as well as our financial guidance for 2019, which we introduced in our earnings press release this afternoon.

I'll then conclude with a few remarks on our strategy and outlook for 2019 before we open the call for your questions.

Simply stated, 2018 was a phenomenal year for Tactile Medical. We achieved revenue of $143.8 million for the full year, representing 32% growth year-over-year, exceeding our 2018 guidance range. Our 2018 revenue growth was driven by sales of our Flexitouch Systems which increased 31% year-over-year to $131.9 million.

Sales of our Entre and ACTitouch Systems also contributed to our 2018 revenue performance, increasing 32% year-over-year to $11.8 million. In 2018, our revenue growth benefited from four primary drivers that we've discussed on our quarterly earning calls throughout the year.

First, our third-generation Flexitouch System, the Flexitouch Plus, was successfully introduced to our prescribing customer base in the second quarter. The features and benefits of this new design allow prescribers to consider Flexitouch for more of their patients. Its ease of use, better fitting garments and reduced treatment time for patients with bilateral disease drove a higher number of prescriptions. With the earlier than anticipated award of a new federal supply schedule contract by the National Acquisition Center of the US Department of Veterans Affairs, we also saw stronger than expected sales of our Flexitouch Plus Systems to VA customers in the fourth quarter.

Second the continued expansion of our sales team which we've grown to include more than 200 in the field at the end of 2018 compared to more than 160 representatives at the end of 2017.

Third, our targeted selling strategy, which focuses our sales team on the most productive accounts in the lymphedema market.

And fourth, the increased in network coverage that we've obtained with commercial insurers in this and prior years, which lowers out-of-pocket expenses for patients and makes our products more affordable. This expanded insurance coverage includes a new national contract with a large third-party payer, which was effective mid-year. The expanded patient access we gained from this new contract provided an additional contribution to our revenue growth in the fourth quarter.

In addition to these primary drivers, we also achieved exceptionally strong sales in the VA healthcare system throughout 2018. Sales into the VA in 2018 increased 42% year-over-year and represented approximately 20% of our total revenue compared to approximately 18% in 2017.

Our success in the VA throughout 2018 was primarily due to the continued effectiveness of our team of dedicated VA specialists, whose expertise helps our sales team navigate the VA system and optimize their selling efforts there.

In addition to our revenue growth, we also reported gross margins of 71%, consistent with our annual target of 70%-plus gross margins and improved our profitability with net income growth of 13% year-over-year to $6.6 million and adjusted EBITDA growth of 74% year-over-year to $17.2 million.

Our operational progress in 2018 was as robust as our financial results. In April, we followed our successful limited market release with the full commercial launch of Flexitouch Plus. The market's response to the features and benefits of this latest generation Flexitouch System has been incredibly positive, resulting in strong adoption particularly in the second half of 2018.

Thanks to the efforts of our payer relations team, we were awarded a new federal supply schedule contract for Flexitouch Plus in September earlier than we expected, which allowed us to introduce our Flexitouch Plus System to the VA channel during the fourth quarter.

Based on the momentum we saw last year, we are confident Flexitouch Plus will continue to remain an important driver of our growth throughout 2019. We also continue to experience steady demand for Flexitouch Head and Neck from customers in lymphedema clinics and the VA, the existing call points where our sales team is currently focused. Importantly, during the fourth quarter of 2018, we added a dedicated marketing and sales professional to lead the development and implementation of our longer-term strategy to drive broad-based adoption of Flexitouch Head and Neck by expanding our marketing and sales efforts to new call points.

In tandem, we've been focused on expanding of our portfolio of clinical support for Flexitouch Head and Neck, which will enable us to gain broad-based reimbursement coverage for that product. I'm excited to announce that these efforts resulted in the publication of our second clinical study of Flexitouch Head and Neck in the Journal Otolaryngology Head and Neck surgery on January 29th of this year. This important study included 10 head and neck cancer survivors that were diagnosed with Head and Neck lymphedema.

Patients imaged before and after a single treatment with our Head and Neck System, and again, after two weeks of daily at-home use with Flexitouch Head and Neck in order to assess the impact of the therapy on lymphatic drainage. The imaging results showed enhanced lymphatic drainage in all subjects after a single Flexitouch treatment. In addition, the researchers also found that after two weeks of treatment, areas of dermal black flow were either reduced or disappeared entirely in six of the eight patients that initially presented with dermal black flow at steady of onset.

In 2019, we expect to build on the compelling findings of this study with additional clinical publications, as we continue to increase the market adoption and reimbursement coverage of Flexitouch Head and Neck.

In 2018, we also laid the groundwork for the future development of our product portfolio with two important strategic transactions.

In June, we acquired the rights to a portfolio of 31 issued and pending patents consisting of intellectual property related to Wright Therapy Products pneumatic compression therapy devices. We believe these patterns will further expand and strengthen our growing IP portfolio and may also help us develop new technological features that could be incorporated into future generations of our Flexitouch Systems.

And in October, we announced an exclusive license agreement with Sun Scientific for the intellectual property of their Aero-Wrap compression therapy products in The United States and Canada. We intend to market these products under the trade name of Airwear. (ph) This agreement provides us with a unique and differentiated technology that we believe represents the innovative static compression product on the market today. Airwear is also highly complementary to our current product portfolio as almost every patient that utilizes one of our product also uses a static compression product.

And most importantly we believe that it will improve our ability to access patients suffering from lymphedema, chronic venous insufficiency and chronic wounds earlier in their treatment pathway. We are currently focused on securing our supply chain in order to initiate a limited launch of Airwear, which we expect will begin in the second half of 2019.

Moving to a review of our performance in the fourth quarter. We achieved revenue of $46.4 million for the fourth quarter of 2018, which represented 33% growth year-over-year. Our impressive revenue growth was again driven by sales of our Flexitouch Systems, which grew 32% year-over-year to $42.7 million in the fourth quarter.

Sales of our Entre and ACTitouch Systems also contributed to our strong fourth quarter performance, growing 51% year-over-year to $3.7 million. This increase in sales was driven by the transition of order processing from the field team to our internal team of specialists.

In addition to the four primary drivers of our 2018 revenue performance that I mentioned earlier, which include our Flexitouch Plus product launch, expanded sales force, targeted selling strategy and increased reimbursement coverage. Our growth in the fourth quarter benefited from exceptionally strong sales of our latest generation Flexitouch System in the commercial and VA channels.

Beginning with the commercial channel. As a reminder during the fourth quarter, many of our potential patients covered under commercial insurance plans have met their annual deductibles, which reduces the out-of-pocket cost of our systems. Because of the seasonal dynamic, our sales force is typically very focused on serving commercial patients during this time to drive sales, and the fourth quarter of 2018 was no exception.

Sales of our Flexitouch Plus Systems to commercial patients also benefited from a new contract that we signed with a large commercial payer effective in July of 2018. We have previously accessed some of this payers plans through a buying group, but the new contract provides us with in-network, direct access to patients covered by all of their plans, albeit at a lower contracted price.

As discussed on our Q3 call, we estimated the ASP impact of this new contract could have been as large as $2 million in the fourth quarter. I'm pleased to report that we were able to more than offset the ASP impact with increased sales to patients covered under this payer's plans. We had anticipated that the expanded access would be a tailwind to revenue growth and we were able to leverage the new contract to increase volume with this payer faster than we had expected, which favorably impacted our fourth quarter sales growth.

We also achieved strong sales of our Flexitouch Plus products in the VA channel. Fourth quarter VA sales grew 37% year-over-year and represented approximately 18% of our total revenue compared to approximately 17% in the fourth quarter of 2017.

Recall that in September 2018, we were awarded a new federal supply schedule contract for our Flexitouch Systems earlier than expected. The inclusion of Flexitouch Plus on the FSS contract is an important milestone for our business, because it allows VA clinicians and staff to easily order the device, enabling us to begin offering it to our existing VA customers and their patients.

We were pleased to see very strong adoption from our VA customers in response to the introduction of the Flexitouch Plus, which resulted in higher than expected VA sales during the fourth quarter.

In conclusion, we were able to bring the year to a very strong close with sales performance that exceeded our expectations during the most important quarter of our year.

With that I'll turn the call over to Brent for a review of our fourth quarter financial results and a review of our guidance for 2019, which we introduced in this afternoon's press release. Brent?

Brent A. Moen -- Chief Financial Officer

Thanks Jerry. Our total revenue for the fourth quarter increased 33% to $46.4 million compared to $34.9 million for the quarter ended December 31, 2017. Our revenue performance in the quarter was driven by sales of our Flexitouch System, which increased $10.3 million or 32% year-over-year to $42.7 million. The increase in Flexitouch System sales was largely driven by expansion of our sales force, the successful rollout of our new Flexitouch Plus system, growth in the Veterans Administration channel, increased physician and patient awareness of the treatment options for lymphedema and expanded contractual coverage with national and regional insurance payers. In addition as Jerry discussed, we experienced increased volume from the new large player contract, that was effective July 1st 2018 as the expanded coverage benefits of that contract will realize faster than we initially anticipated.

Flexitouch sales accounted for 92% of our total revenue in the fourth quarter of 2018 compared to 93% last year. Entre and ACTitouch Systems sales increased approximately $1.3 million or 51% year-over-year to $3.7 million in the quarter.

This performance was better than expected and reflects an increase in the productivity related to our strategic shift to manage these orders in-house as well as the contribution from higher-than-expected volume from the new large commercial payer contract.

Fourth quarter revenue by payer was 70% commercial 18% VA and 12% Medicare compared to 77%, 17% and 6% respectively last year. Fourth quarter gross profit increased $6 million or 23% to $32 million compared to $26.1 million last year. GAAP gross margin of 69% of sales in the fourth quarter was compared to 75% of gross margin sales in the fourth quarter of 2017.

The current period gross margin was primarily impacted by four items. First, a $721000 non-cash inventory write-off of our ACTitouch inventory. Second incremental pricing headwinds related to the new large commercial payer contract. Third, mix impacts related to our composition of revenue in the fourth quarter by product as well as by payer when compared to last year. And to a lesser extent non-cash amortization expense related to the intangible assets licensed from Sun Scientific.

Excluding the impact of the non-cash inventory write-off, our non-GAAP adjusted gross margin was 70.5% of sales in the fourth quarter of 2018 compared to 74.7% of sales in the fourth quarter of 2017.

Fourth quarter operating expenses increased $8.8 million or 41% to $29.9 million compared to $21.1 million last year.

The increase in operating expenses in the fourth quarter was primarily driven by an increase of $5.1 million or 40% year-over-year in sales and marketing expenses due to continued investment in field and inside sales team expansion, increased commissions on higher revenue and marketing initiatives.

Operating expenses also included a $1.8 million non-cash impairment charge related to our ACTitouch intangible assets.

Operating income for the fourth quarter of 2018 decreased $2.8 million or 57% to $2.1 million compared to operating income of $4.9 million last year. Excluding the $2.5 million non-cash impairment charges non-GAAP adjusted operating margin decreased approximately $300,000 or 5% to $4.6 million in the fourth quarter of 2018.

We recorded an income tax benefit of $84,000 for the fourth quarter of 2018 compared to an income tax expense of $2.8 million last year. The tax benefit recognized in the fourth quarter of 2018 was primarily related to the impact of tax-deductible stock-based compensation activity.

Fourth quarter 2017 income tax expense included approximately $1.2 million of incremental expense associated with the revaluation of deferred tax assets and liabilities resulting from the enactment of the Tax Cuts and Jobs Act in December 2017.

Net income for the fourth quarter of 2018 increased approximately $125,000 year-over-year to $2.4 million or $0.12 per diluted share compared to net income of $2.2 million or $0.12 per diluted share for the fourth quarter of 2017.

Weighted average shares used to compute diluted net income per share were $19.5 million and $19.1 million for the fourth quarters of 2018 and 2017 respectively. Fourth quarter adjusted EBITDA increased approximately $1.4 million or 21% to $8.2 million compared to adjusted EBITDA of $6.8 million in the fourth quarter of 2017.

Our adjusted EBITDA margin was 17.7% in the fourth quarter of 2018 compared to 19.5% in the fourth quarter of last year. As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

Turning to a brief review of our fiscal year results for the 12 months ended December 31st, 2018. Total revenue increased $34.5 million or 32% to $143.8 million compared to $109.3 million for the 12 months ended December 31 2017.

Increase in revenue was primarily driven by an increase of approximately $31.6 million or 31% year-over-year in sales of the Flexitouch Systems. Sales of our Flexitouch Head and Neck products performed well and continue to represent low to mid-single-digit percentage of total Company revenue on par with our expectations for this year.

2018 revenue by payer was 71% commercial, 20% VA and 9% Medicare compared to 74%, 18% and 8% respectively last year. Net income for 2018 increased $768,000 or 13% to $6.6 million or $0.34 per diluted share compared to net income of approximately $5.9 million or $0.31 per diluted share last year.

Weighted average shares used to compute diluted net income per share were $19.3 million and $18.9 million for the 12 months ended December 31st, 2018 and '17 respectively.

Adjusted EBITDA for 2018 increased $7.3 million or 74% to $17.2 million compared to adjusted EBITDA of $9.9 million for the 12 months ended December 31 2017. Adjusted EBITDA margin for 2018 increased 290 basis points to 12% compared to 9.1% for 2017. At December 31, 2018, cash, cash equivalents and marketable securities were $45.9 million compared to $43. 9 million at December 31, 2017. The Company had no outstanding borrowings on its $10 million revolving credit facility at year-end.

Let me now turn to review our 2019 revenue guidance which we introduced in our earnings release this afternoon. For 2019, we expect total revenue in the range of $173 million to $175.5 million, which represents growth of 20% to 22% year-over-year compared to revenue of $143.8 million in 2018. This revenue guidance assumes sales of our Flexitouch products increase 20% to 22% year-over-year in 2019, sales of our Entre products increase approximately 23% year-over-year. We expect Head and Neck sales in the low to mid-single-digits as a percentage of total revenue, and further, we expect sales of Airwear to be immaterial to 2019.

Additionally for full year 2019, we expect our gross margin to remain in the low 70% range, our adjusted EBITDA margin to be approximately 13%, including an expectation of stock compensation expense of approximately $9 million. In addition, our EBITDA margin includes approximately $2 million of expenses related to the planned move to our new corporate headquarters in the fourth quarter of 2019. Of this approximately $400,000 are moving expenses, which will only impact of our full year 2019 P&L. The remaining expense comes from accelerated depreciation on our current facility and higher rent expenses related to the occupancy at both the current and new facility this year.

And lastly for purposes of calculating earnings per share, we expect our fully diluted weighted average share count for the year to be 20 million shares.

With that, I'll now turn the call back to Jerry for some closing remarks. Jerry?

Gerald R. Mattys -- Chief Executive Officer and Director

Thank you Brent. With an enhanced and expanding portfolio of differentiated products, multiple tailwinds in our business and another year of strategic execution, we remain very well positioned to continue to drive strong, sustained and profitable growth. In 2019, we're again committed to growing our revenue by 20% or more, while also continuing to improve our profitability.

Our 2019 revenue growth will be fueled primarily by the market's increasing adoption of our Flexitouch Plus System, along with the recent expansion of our field sales team, which exceeded our hiring goals last year and our commitment to growing our sales headcount by approximately 20% again this year. The impact of our targeted sales strategy as we continue to focus our reps on those clinicians diagnosing the highest number of lymphedema patients and improving our selling effectiveness in the VA and our widespread in-network coverage with commercial insurers.

With respect to our account targeting strategy, we performed another data analysis of medical claims in December of 2018. The data showed there were 1.1 million patients diagnosed with lymphedema in the 12-month period ending June 30, 2018 compared to 700,000 patients in the 12-month period ending December 31, 2013 the first time we performed this analysis. This represents a compounded annual growth rate of 11% over the last four and half years. While we're proud of the strong growth we've reported in recent years and the mounting evidence that the awareness of lymphedema is growing, remember, we remain in the early stages of penetrating the large and addressable market opportunity in the United States. Specifically, the most recent claims data showed more than 4,700 high diagnosing facilities in the United States and nearly 50% of these facilities had at least one clinician doing business with Tactile Medical. This compares to a little more than 40% of the high diagnosing facilities as of the last claims data pool in 2017.

We believe this new claims data not only reinforces the progress we have made in penetrating the market over the last two years, but also shows the significant opportunity that remains as we focus our sales force on the many high diagnosing facilities that are not currently doing business with Tactile Medical. We are intently focused on introducing our differentiated at-home lymphedema treatment option to all of these high diagnosing facilities in the coming years.

In addition to driving further growth in sales of our Flexitouch Plus System in 2019, we will continue to focus on the development and implementation of our strategy to expand the commercialization of Flexitouch Head and Neck outside of our existing call points, while conducting additional clinical studies and publishing a sufficient body of clinical evidence to support our reimbursement strategy. We will also plan and prepare for the limited market release of our new Airwear product in the second half of 2019.

More broadly, we remain convinced that our differentiated business model, reimbursement expertise and industry-leading products supported by strong clinical data, will continue to serve as important tailwinds to our commercial success in the United States lymphedema and chronic venous insufficiency markets and ensure our position as the market leader. Not only are we the market leader, but the addressable market opportunity for Tactile Medical continues to grow at an impressive pace as evidenced by the double-digit compounded annual growth rate over the past four and half years. In addition, our addressable patient population remains vastly under-penetrated given that Tactile Medical shipped over 32,000 Flexitouch Systems during 2018.

With this in mind, despite our rapid pace of growth, we're still in the early stages of penetrating our addressable market opportunity in the US.

We also identified that there are more than 2,300 high diagnosing facilities in the US that are not currently customers of Tactile Medical. Thus, we continue to see ample opportunity to expand both our coverage and penetration of these high diagnosing facilities in 2019 and beyond.

In conclusion, for all these reasons, Tactile Medical will continue to lead the US lymphedema market and grow our share of the $4 billion plus opportunity that it represents in 2019 and in the years to come. We would like to thank our shareholders and employees for their continued support of our Company in its mission to help people with chronic disease lives better and care for themselves at home. We appreciate everyone on tonight's call for their interest in Tactile Medical.

Operator, we will now open the call for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question will comes from the line of Will Inglis of Piper Jaffray. Please go ahead, your line is open.

William Inglis -- Piper Jaffray -- Analyst

Hi, guys. Good afternoon. This is Will on for JP. Thanks for taking the questions.

Gerald R. Mattys -- Chief Executive Officer and Director

Hey, Will.

William Inglis -- Piper Jaffray -- Analyst

I guess my first question would be regarding the sales force headcount growth you're expecting for '19 above 20%. Just curious just the level of reps you're expected higher for the Head and Neck -- for the Head and Neck group. And that beyond that just maybe any updates on the amount of productivity that you expect to grow in '19 with existing sales force?

Gerald R. Mattys -- Chief Executive Officer and Director

Understood (ph) Will, thanks very much for the questions. Specific to growth in our sales organization, we do intend to add another 20% to the field organization in 2019. We believe that's a number that we can consistently deliver, identify, train and bring up to speed. The way our sales force is currently configured, there are no specific Head and Neck specialists at this point in time. I mentioned on the call that we did hire a sales and marketing executive to help us put together the plan for how we'll reach beyond our current call points with lymphedema clinics and the VA to gain access to the broad market for treating Head and Neck lymphedema, but those plans are still under development and we should be able to update those maybe in the second quarter of this year.

Operator

Your next question comes from the line of Chris Pasquale of Guggenheim. Please go ahead, your line is open.

Chris Pasquale -- Guggenheim -- Analyst

Thanks, and congrats on another strong quarter, guys. Jerry, I think the first question a lot of people are going to have is why growth should drop off in '19 versus the 30% run rate you guys have been putting up for several years now, understanding that the number get bigger each year. Can you quantify a couple of things. One the volume bolus that you thought you saw from this new payer contract just to help us gauge how difficult the comparison that sets up in the back half of 2019? And then maybe speak to what you're assuming for pricing overall in 2019 as you get a full year of that new payer contract flowing through? Thanks.

Gerald R. Mattys -- Chief Executive Officer and Director

You bet. Thanks, Chris. Appreciate the question. First of all, we're very confident in the growth outlook and expect the primary drivers in 2019 to be the addition of our sales reps to our base as well as the access or exposure of this compelling new technology in Flexitouch Plus. You actually hit upon one of the three items that I would point out are not assumed in our 2019 guidance.

The first is that volume bolus, that was your terminology we consider to be the large payer contract dynamic that we experienced in the fourth quarter related to getting in-network coverage from all of those added plans that this large payer was able to deliver for us.

The net result of that timing that we signed the contract and brought it on board in July was that and then they got opened up their other plans to us. The net impact for the patient was that we went from being an out-of-network provider to an in-network provider in a time period, where many of these patients had already met their deductibles. So we went from a very expensive piece of equipment to a very inexpensive piece of equipment.

The second dynamic is really around pricing. And interestingly, we have historically seen pricing headwinds in the mid-single digits. In 2018, we were actually in the low single digits. And our guidance going forward to your question assumes mid-single digit headwinds normalized for our more long-term trend of what we have seen historically.

I think the third driver that we wanted to point out that was not assumed in our 2019 guidance is the fact that Entre growth this year was significantly more of a contributor than we anticipated. You may remember our original guidance for 2018 assumed pretty flat Entre growth for the year. We ended up driving an incremental $3 million in growth in 2018 from that product. That came to us because we moved the responsibility for processing those orders from our field team so they could focus on Flexitouch, and because the backlog was building up of those Entre orders that weren't being addressed. We don't expect that backlog to repeat itself in 2019.

Brent A. Moen -- Chief Financial Officer

Say -- just to back that one question, Chris hold on, I just want to make sure that we addressed Will's second question yet and his second question related to productivity for rep in 2019, and just to make sure that we cover off on Will's open question, I will tell you that we do have modest improvement relative to rep productivity in 2019 relative to 2018. So I just want to make sure we covered up on Will's question. Sorry Chris didn't mean to interrupt.

Chris Pasquale -- Guggenheim -- Analyst

No. That's OK. Thanks, Brent. And my second question was just around the next steps for the Head and Neck indication. You've got two studies published now. I believe you have a third one that has completed enrollment. So what's the timing around that? And does that complete you think the clinical work that you're going to need to get these new codes when could those actually be in place? Thank you.

Gerald R. Mattys -- Chief Executive Officer and Director

Yeah. Thanks Chris. We -- first of all, just level set everyone, the Head and Neck progress that's being made is we actually thought in 2018, we'd be exactly where we are from a revenue perspective. I have to say though it's taken us little longer to establish these commercial plans and get these clinicals published than we anticipated.

We would like to had our sales and marketing executives hired by mid-year. It actually happened later in the year. And we've had to your point two studies published, but we've had a third one complete for more than six months now. So I think we're a little behind in where we thought we'd be on the Head and Neck development.

You're correct two clinical publications to date with one of them happening in January of this year, two more expected in '19. Our focus in 2019 for the Head and Neck is to continue to invest in clinical evidence development.

I do not believe we have enough clinical evidence in place today to go get coding coverage for that Head and Neck accessories or the Head and Neck garments. So I think we have to continue to invest in that Head and Neck evidence development. We're going to continue to educate the market as we're the only ones with a solution for that particular indication and as well as finished the definition of our go-to-market strategy outside of our current call points.

So we're expecting it to be a contributor again in 2019, but in the low to mid-single-digits is what we are looking for contribution from Head and Neck.

Operator

Your next question comes from the line of Anna Nussbaum of William Blair. Please go ahead, your line is open.

Anna Nussbaum -- William Blair -- Analyst

Hi. Can you hear me?

Gerald R. Mattys -- Chief Executive Officer and Director

Yes now.

Anna Nussbaum -- William Blair -- Analyst

Sorry about that. This is Anna in for Margaret. Thanks for taking my question. I wanted to touch base again on guidance relative to the volume benefit seen in the fourth quarter. Are you essentially assuming these benefits are continuing into 2019? And then what are you assuming in guidance in terms of those VA contribution given the new supply schedule for Plus and then any changes in commercial contracts? Thanks.

Gerald R. Mattys -- Chief Executive Officer and Director

So we've got VA, commercial and volume from the new contract. Let me start with VA. Our growth in last year was about 42%, which pushed the total sales to 20% of revenue. The VA specialists that we've put in place have been extraordinarily helpful for our local sales team in supporting them and navigating the VA channel. We think there is a tremendous opportunity to continue going deeper into the accounts we've already opened and as we included in our 10-K this afternoon, we've gone from 140 to 150 of the VA hospitals being active in terms of ordering product from us.

I think the biggest addition is the Flexitouch Plus to the federal supply schedule. So we anticipate that's going to be a nice tailwind for us coming into 2019. So we expect it to be a contributor in that 20% range in 2019 as well that's the VA piece.

On the commercial payer piece, we actually are on contract with all five of the top payers, so don't anticipate a big movement from any new payer. We still have some regionals that we're working with to try to get on contract as an in-network provider. But I think a lot of that work is already done. So might expect them we're going to see a big impact on adding new lives -- new covered lives to our queue. We do expect we're going to have more volume coming from the new payer. I think what we were trying to get across is because of the timing and because of the fact that we were out of network last year, we got an unexpected bolus of orders in the third and fourth quarter mostly in the fourth quarter as a result of our contract with that payer.

The patient that might have seen our product before we got on contract, pretty much didn't buy it, because the co-payments were too high or the deductible plan -- their deductible or their out-of-pocket costs were too high. And we had a number of those as we came through the fourth quarter with literally zero deductibles. So that's the part that we don't think is going to repeat. We do expect that volume will continue, but remember, we gave this pair a pretty sizable reduction in price. So we expect the volume to offset that deduction in 2019.

Anna Nussbaum -- William Blair -- Analyst

Okay. That's helpful. Yeah. Thank you. And then just on adjusted EBITDA, margins came in pretty strong roughly 18% in the quarter, though, it looks like that it did benefit from about $2.5 million in impairment and inventory write-offs. Can you just remind us some of the puts and takes there and how we should think about profitability throughout 2019?

Brent A. Moen -- Chief Financial Officer

Sure. Anna, I'll help you with that one. So you're right we did have nice adjusted EBITDA performance for Q4 and for the full year and that does exclude the impairment charge that we did take relative to ACTitouch. Probably the biggest put and take relative to our adjusted EBITDA was the gross margin impact that I alluded to in my remarks.

Our GAAP gross margin came in at 68.9%, but if you add back the inventory impairment associated with ACTitouch that we took our adjusted margin is 70.5%. And then we're certainly within our full year kind of guidance range, but the delta between this year and last year really ends up being the pricing impact from the large player contract that Jerry was talking about as well as mix that we're experiencing on payer and product differences between 2018 and 2017. So those are the biggest items that impacted our adjusted EBITDA.

Anna Nussbaum -- William Blair -- Analyst

Okay. Thanks. And then just how we should think about that going into this year?

Brent A. Moen -- Chief Financial Officer

Yeah. No. Happy to help. Our 2019 guidance that we set forth was we expected adjusted EBITDA to come in at 13%. So a step up of approximately 32% year-over-year compared to our revenue growth expectations of 20% to 22%. So we should see some leverage certainly in our adjusted EBITDA. And just keep in mind as I pointed out in my comments, to that 13% includes some incremental rent expense as we plan to move from our existing headquarter facility into the new facility later this year.

Anna Nussbaum -- William Blair -- Analyst

Okay. Thank you.

Brent A. Moen -- Chief Financial Officer

You're welcome.

Operator

Your next question comes from the line of Jason Mills of Canaccord Genuity.

David Westenberg -- Canaccord Genuity -- Analyst

Hey. It's David on for Jason. Can you hear me alright?

Gerald R. Mattys -- Chief Executive Officer and Director

Hey, David.

Brent A. Moen -- Chief Financial Officer

Hi, David.

David Westenberg -- Canaccord Genuity -- Analyst

Hey. First of all, thanks for taking the question. Congrats on the strong quarter. First question I want to ask is around FY '19 guidance. Could you provide any color around -- additional color around the assumptions kind of baked in specifically regarding the cadence of sales rep hires in the year and as well as where you kind of see any propensity to deliver on the upside and what kind of drivers then your assumptions are kind of have the highest opportunity to deliver on the upside?

Gerald R. Mattys -- Chief Executive Officer and Director

So you may remember from last year, we got out of the gate rather slowly in our hiring. And in fact, we're behind in our hiring plans for certainly the first half of the year and made most of our hires in the second half. We learned a lot from that experience. We brought on a new Chief Human Resources Officer, a couple of dedicated sales recruiters, we've revamped our approach as to how we go about bringing on new folks, and I believe it served us very well. So that explains all the way up to the beginning of 2019.

Our plans for 2019 is to do as much as we can in the first two to three quarters, so that we don't have to bring anyone else on in the fourth quarter. That's the way we built our plan, that's what we've been able to executive in years past other than 2018, and that's the way we would prefer to see it done.

We're pretty comfortable with the growth outlook that we've put in place other than the things I mentioned that we did not assume are in our plan, our biggest drivers are Flexitouch Plus, the attractiveness of that product versus our competition, and more importantly, allowing over physicians and clinicians to think about Flexitouch for more of the patients I think will be the biggest driver and then we just talked about the sales reps. Those are the two things that I would point to as the biggest drivers for our success in '19.

David Westenberg -- Canaccord Genuity -- Analyst

All right. Thanks. And then maybe touching on the Aero-Wrap product. Looking, I guess into 2020, if it's not going to contributing to 2019. Could you provide any color on kind of what type of cross-selling opportunities you see with the product given that it kind of gives you the ability to accept patients earlier kind in that continuum of care and then maybe and so far as if you quantify kind of the size of the opportunity you have maybe of the middle and long-term with the product? Thanks.

Gerald R. Mattys -- Chief Executive Officer and Director

Yeah. I'd be happy to. We are really excited about the Airwear technology. We're in the midst of securing the supply chain. We think it is the best of all of the static compression systems that are on the market today in terms of addressing patients ease of use and ability to put on and take off the static compression system that they inevitably need to treat their chronic swelling problem. We're excited about it, because all payers require a trial of conservative therapy before they'll move a patient up to considering one of our pneumatic compression systems. And thus Airwear is a potential solution for those patients with lower extremity swelling that they can get into right away. Once we get to know that patient we believe we can pull through some additional sales of our Entre and Flexitouch products once we've had exposure to that patient which we currently don't have today.

The market itself, we're really relying on that pull through to be significant in 2020, because we're not planning a launch, it will do a limited launch which is our usual cadence in the second half of 2019 and then roll it out to the rest of the sales organization toward the end of the year.

Operator

Your next question comes from the line of Suraj Kalia of Northland Securities. Please go ahead, your line is open.

Suraj Kalia -- Northland Securities -- Analyst

Sure. Good afternoon, everyone. Can you hear me all right?

Gerald R. Mattys -- Chief Executive Officer and Director

Yes, Suraj. Thank you, and welcome.

Brent A. Moen -- Chief Financial Officer

Hi, Suraj.

Suraj Kalia -- Northland Securities -- Analyst

So Jerry, congrats on a great quarter. Couple of questions from my side and I know you have provided qualitative commentary. I was wondering, if you could put some boundaries around specifically this contract payer in a way you all are going direct. I heard a $2 million ASP impact in fourth quarter. Obviously, there is a bolus. Forgive me if I missed the exact dollar amount that came through from this contract payer and at what margin specifically this contract was provided?

Gerald R. Mattys -- Chief Executive Officer and Director

Sure. So the reference to the $2 million was what we talked about at the end of -- in our third quarter earnings call and we were forecasting forward that because of the pricing that we gave away if you will to get on this contract, it could have an impact of $2 million in the fourth quarter. The good news is we were able to make up that whole revenue impact by increased volume in the fourth quarter.

As we mentioned then Suraj, the pricing that we agreed to with this payer was roughly in line with other pricing from large commercial payers. So we don't see it being, it came down to what I would consider to be a more normal level than where it was previously. So we don't release gross margins by payer. Obviously, that's a confidential negotiation between us and them, but I would say they are more in line with the others than they were previously.

Suraj Kalia -- Northland Securities -- Analyst

And finally Jerry just to follow up on that for FY '19, I heard a low 70s gross margin. Can you help us reconcile the FY '19 gross margin guidance with expected contribution from this contract there and forgive me maybe it sounds unfair, because you don't want to give specifics on this payer. Just help us put some goalpost somewhere so that we can triangle it and at least make some assessment from a modeling perspective. Thank you again, and congrats.

Gerald R. Mattys -- Chief Executive Officer and Director

Thank you. This new payer we now have at what I would say normal pricing levels. So that's one of the drivers of why we feel comfortable about 70-plus percent gross margin in 2019. We build into our assumptions for that for 2019 mid single-digit price erosion. So we've already built in what our expected impact is for this payer in that assumption of mid single-digit price erosion. So we're very confident we can get to that and deliver on that 70-plus percent gross margin going forward.

Operator

Your next question comes from the line of Mitra Ramgopal of Sidoti. Please go ahead, your line is open.

Mitra Ramgopal -- Sidoti -- Analyst

Yes. Hi, good afternoon. Jerry, I was wondering as you look out to remainder of '19 and even beyond, any plans in terms of trying to do more on the outside of the US? I know that's something you've talked in the past and I'm just wondering if we are closer to getting there?

Gerald R. Mattys -- Chief Executive Officer and Director

Hey, Mitra, thanks for the question, and let me address it specifically. As -- we've talked about the desire to expand beyond the US borders for quite some time now. The gating item has been and continues to be the changes in the quality system that will be required of Tactile to be able to meet the European regulations. We are still scheduled for that audit or that visit here in the first half of this year. After which we can self apply the CE Mark to our product and get going, selling products internationally. In 2019, we have no revenue assumed for international. We built in some costs as we expect to explore how we go about international distribution, but I harken back to the fact that we are so under-penetrated in the US market that, that is our laser focus for 2019.

We sold 35000 units last year -- 32,000 sorry, units last year and that's on 1.1 million patients diagnosed. So this is a vastly under penetrated market that we're in now and we want to try to focus our efforts there.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks. That's great. And then just a quick question on the reimbursement front, as you look at gross margin continue to expand, any potential headwinds there?

Brent A. Moen -- Chief Financial Officer

Hi, Mitra. It's Brent. Actually in our gross margin for 2018, I kind of went through a little bit earlier on the call, but the impact that we had from a large payer certainly had an impact in our overall 2018 gross margin. As Jerry pointed out, we do have that booked into our expectation for 2019, and we feel confident that we should be able to hit our low 70% gross margin for 2019.

The one thing that I will be just mindful of is in the first half of the year some of that pricing headwinds, because we haven't anniversaried it yet, will impact our first half of the year versus the second half when the contract came into play.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks again for taking the questions.

Gerald R. Mattys -- Chief Executive Officer and Director

You bet.

Operator

This has completed the allotted time for questions. And that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Duration: 58 minutes

Call participants:

Gerald R. Mattys -- Chief Executive Officer and Director

Brent A. Moen -- Chief Financial Officer

William Inglis -- Piper Jaffray -- Analyst

Chris Pasquale -- Guggenheim -- Analyst

Anna Nussbaum -- William Blair -- Analyst

David Westenberg -- Canaccord Genuity -- Analyst

Suraj Kalia -- Northland Securities -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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