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Tactile Systems Technology, Inc.  (NASDAQ:TCMD)
Q1 2019 Earnings Call
May. 06, 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 First Quarter of 2019 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 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 the 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 Risk Factors section of our most recent annual report on Form 10-K as well as our most recent 10-Q filing filed today with the Securities and Exchange Commission. 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 or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with 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

Thank you, operator. Good afternoon and welcome everyone to our first quarter of 2019 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 start with a review of our financial performance highlights for the first quarter of 2019 and commentary on the primary drivers of our revenue growth. Then, I'll provide a brief update on our recent operational progress that we've made during the quarter. Brent will then discuss our financial results in detail and review our financial guidance for 2019, which we updated in our earnings press release this afternoon. I'll then share some additional closing thoughts before we open the call for your questions.

Our revenue performance in the first quarter represented a strong start to 2019. We achieved revenue of $37.6 million for the first quarter, which represented 40% growth year-over-year. Our revenue growth in the first quarter was driven by sales and rentals of our Flexitouch systems, which increased 39% year-over-year to $34.1 million. Additionally, we saw contributions from sales and rentals of our Entre and Actitouch systems with revenue increasing 51% year-over-year to $3.5 million.

Our reported revenue results during the quarter were favorably impacted by our adoption of ASC 842, a new accounting standard for leases. The adoption of ASC 842 increased 2019 first quarter total revenue by 10 percentage points compared to first quarter 2018. Even without the impact of the accounting change, our top line grew 30% compared to the same quarter last year. This is a great start to 2019. Brent will discuss the accounting standard and its impact on our financial reporting and full year 2019 guidance in his prepared remarks.

Our revenue growth benefited from four primary drivers during the first quarter. First, our third generation Flexitouch system, the Flexitouch Plus continues to drive growth because of its ease of use, better fitting garments and reduced treatment time for patients with bilateral disease. The features and benefits of this new design allow prescribers to consider Flexitouch for more of their patients. Second the recent expansion of our sales team. At the end of December of 2018, our field sales team included more than 200 sales representatives, which exceeded our hiring goals for 2018. Our sales performance during the first quarter benefited from the contribution of these additional feet on the street. We also continued to make progress in the expansion of our sales team during the initial months of the year, ending the first quarter with more than 210 sales representatives.

Third our targeted selling strategy, which focuses on our sales representatives on the most productive accounts in the lymphedema market, based on our latest analysis of medical claims data, which we performed in December, there were more than 4,700 high diagnosing facilities in the United States. Nearly 50% of these high diagnosing facilities had at least one clinician doing business for Tactile Medical as of the end of 2018. This leaves us with plenty of opportunity to drive growth by going deeper in these existing accounts, while adding new high diagnosing facilities to our customer base.

And fourth, our increased coverage with commercial payers. as an in-network provider continue to serve as an important tailwind to our performance by lowering out-of-pocket expenses for patients covered under commercial insurance plans. Specifically, higher than expected volume from a new contract that expanded our in-network coverage with one of the top five largest commercial payers was an important source of upside during the first quarter. As we previously discussed, we signed a new direct contract with this large commercial payer last year, which became effective in July of 2018. We had previously accessed some of this payer's plans through a buying group. The new contract provides us with direct in-network access to patients covered by all of their plans at a lower contracted price.

During the first quarter, we were able to leverage our expanded access to patients covered by this payer to drive increased sales volume, which more than offset the ASP impact from this new contract and contributed to the strong growth that we saw in the commercial channel. In addition to these primary revenue drivers, our first quarter results also benefited from strengthened sales to the Medicare and VA channels. Strong sales of our Entre/Actitouch products to the Medicare channel reflects increasing productivity related to our strategic shift to manage these orders in-house and to a lesser extent the contributions from higher than expected volume from the new contract with a large commercial payer. Clearly, the strategic decision to transition Entre/Actitouch order processing from our field team to our internal team of specialists is paying dividends.

We also continue to see strong performance in the VA during the first quarter, in part due to the efforts of our dedicated VA specialists who have helped our sales reps market more effectively within the VA hospital system. Recall, that we were awarded a new federal supply schedule contract for our Flexitouch Plus system in September of 2018 by the National Acquisition Center of the US Department of Veterans Affairs. Having Flexitouch Plus on the contract streamlines the purchasing process for VA clinicians and staff and has been an important contributor to our growth in the VA channel in recent months.

We complemented our revenue performance during the quarter with gross margins of 70% and improvements in our profitability. Our Q1 net income was $1.5 million compared to a $50,000 net loss last year and we reported adjusted EBITDA of $2 million compared to adjusted EBITDA of $100,000 in the first quarter of 2018.

I'll now turn to a discussion of our operational performance during the quarter. During the first quarter, we continued to make progress with respect to the commercialization of our latest products, Flexitouch Plus, Flexitouch Head and Neck and our Airwear static compression product. As we had anticipated coming into 2019, our Flexitouch Plus system continues to be the primary driver of our revenue growth. It has now been over a year since the launch of this product and we continue to see strong demand for the system from both new and existing clinician customers.

One of the important advantages of this latest generation Flexitouch system is its ability to enable patients with lymphedema in the lower extremities to treat both legs simultaneously, potentially cutting their required treatment time in half. This is one of the features that is resonating very well with our clinician prescribers and their patient customers. As a result, we've seen a notable uptick in the number of referrals for patients with lymphedema in the lower extremities in recent months, including many referrals from clinicians that had not referred our products in the past, which we directly attribute to the introduction of the Flexitouch Plus.

The performance of our Flexitouch Head and Neck product in the first quarter was consistent with our expectations. Our sales team remains focused on selling Flexitouch Head and Neck into our existing call points, lymphedema clinics and the VA and we continue to expect Flexitouch Head and Neck sales in the low to mid single-digits as a percentage of our total revenue in 2019.

In order to obtain broad-based reimbursement coverage for Flexitouch Head and Neck, we've been focused on establishing a comprehensive portfolio of clinical support. With this objective in mind, on the January 29th, we published our second clinical study of Flexitouch Head and Neck in the Journal Otolaryngology Head and Neck Surgery. In this study, 10 cancer survivors with head and neck lymphedema were imaged before and after treatment using our Flexitouch Head and Neck system, so that researchers could assess the impact of the therapy on lymphatic drainage. Importantly, after a single treatment with Flexitouch Head and Neck, all of the study subjects demonstrated enhanced lymphatic drainage. After two weeks of daily at home use of Flexitouch Head and Neck, areas of dermal back flow, a key measure of impaired circulation, were either reduced or disappeared entirely in six of the eight subjects that initially presented with dermal back flow.

Our clinical team is focused on further expanding our portfolio support for Flexitouch Head and Neck in 2019, which will culminate in the completion and submission of two additional clinical manuscripts this year. We are also working to develop our longer-term strategy to expand our commercialization of Flexitouch Head and Neck outside of our traditional call points under the direction of a dedicated head and neck marketing and sales professional who joined Tactile Medical during the fourth quarter of last year.

Lastly, we continue to make important headway in securing our supply chain in preparation for the launch of Airwear, our new compression therapy product. We acquired the intellectual property for Airwear, formerly known as Aero-Wrap in October of last year as part of our exclusive license agreement with Sun Scientific. Airwear is an easy product to use and from a technology perspective represents what we believe to be the most innovative static compression product on the market. The addition of Airwear to our portfolio of products will enable us to begin building relationships with patients early in their treatment pathway, since patients are often required to try conservative therapy before their insurance will cover the purchase of one of our pneumatic compression devices. We expect to begin the limited launch of our Airwear product during the second half of this year before rolling it out to our entire sales organization by year-end.

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

Brent A. Moen -- Chief Financial Officer

Thanks, Jerry. Total revenue for the first quarter increased 40% to $37.6 million compared to $26.8 million for the quarter ended March 31, 2018. Our total revenue performance in the quarter was driven by sales and rentals of our Flexitouch systems, which increased $9.6 million or 39% year-over-year to $34.1 million. The increase in Flexitouch system sales and rentals was largely driven by the expansion of our sales force, continued growth in the Medicare and VA channel, increasing physician and patient awareness of the treatment options for lymphedema and expanded contractual coverage with national and regional insurance payers.

As Jerry mentioned, we experienced strong sales volume through a large commercial payer that exceeded our expectations and more than offset the expected pricing impact of the related new contract, which went into effect on July 1, 2018. Flexitouch sales accounted for 91% of our total revenue in the first quarter of both 2019 and 2018. Entre and Actitouch sales and rentals increased approximately $1.2 million or 51% year-over-year to $3.5 million in the quarter. Our performance in this product category continues to benefit from both our strategic decision in 2018 to manage these orders in-house as well as the contributions from the higher than expected volume from the new large commercial payer contract.

First quarter revenue by payer was 69% commercial, 20% VA and 11% Medicare compared to 69.5%, 23% and 7.5%, respectively, last year. It is important to note that our total revenue growth during the first quarter benefited from the adoption of a new accounting standard, which changed our revenue recognition practices for rental sales. As a reminder, a portion of our revenues are derived from patients that obtain our products under rental arrangements, with rental periods of up to 10 months in length.

The new lease accounting standard, ASC 842, became effective January 1, 2019 and requires us to recognize rental revenue upon commencement of the rental agreement versus our past practice of spreading that revenue over the life of the rental agreement. We adopted the new guidance for lease accounting on a modified retrospective basis, which does not require us to restate any of our prior periods. Accordingly, the impact on first quarter 2019 is not comparable to the 2018 first quarter reported amounts. First quarter 2019 total rental revenue is reported in accordance with the new accounting standard, which requires rental agreements that begin after January 1, 2019 to be recorded as sales type leases and recognize all of the revenue upon commencement of the rental agreement. Revenue recognition is different for rental agreements in place prior to December 31, 2018. For those agreements, we will continue to recognize revenue on a month-to-month basis as an operating lease until they are completed, which we anticipate to be in the fourth quarter of this year.

The first quarter financial impact of the adoption of the new lease accounting standard benefited our total revenue growth by 10 percentage points. Finally, as it relates to the new lease accounting, we now classify revenue from garments sold to our rental customers as rental revenue beginning in the first quarter of 2019. This garment revenue was previously classified as sales revenue. For consistency and comparability, garment revenue associated with rental agreements was reclassed to rental revenue in the first quarter of 2019. To aid in comparison with our new revenue and gross profit reporting, we have included an unaudited supplemental schedule in the Events section of our Investor Relations website and as an Appendix to our 8-K filed this afternoon. This schedule details by quarter the composition of our previously reported total revenue and gross profit results into revenue from sales and revenue from rentals as well as the corresponding gross profit for sales and rentals for fiscal years 2018 and 2017. We have also included the amount of garment revenue that was reclassified from sales to rental revenue to aid in comparison with our go-forward reporting convention.

Turning to the rest of the P&L. First quarter gross profit increased $6.7 million or 34% to $26.3 million compared to $19.5 million last year. Gross margin was 70% of sales in the first quarter of 2019 compared to 73% of sales in the first quarter of 2018. The decrease in gross margin was primarily attributable to incremental pricing headwinds related to the new contract with a large commercial payer and new pricing related to the Flexitouch Plus's addition to the federal supply schedule last fall. Gross margin was also impacted by mix related to the composition of revenue byproduct as well as bypayer when compared to the prior year. And to a lesser extent, non-cash amortization expense related to the intangible assets licensed from Sun Scientific.

First quarter operating expenses increased $6.7 million or 31% to $28.1 million compared to $21.4 million last year. The increase in operating expenses in the first quarter was primarily driven by a year-over-year increase of $4.8 million or 38% in sales and marketing expenses due to the continued investments in the field sales team and increased spending on marketing initiatives. Operating loss for the first quarter of 2019 decreased $25,000 or 1% to $1.8 million compared to an operating loss of $1.8 million last year.

We recorded an income tax benefit of $3.1 million for the first quarter of 2019 compared to an income tax benefit of $1.7 million last year. The tax benefit recognized in the first quarter of 2019 was primarily related to the impact of tax deductible stock-based compensation activity. Net income for the first quarter of 2019 increased to $1.5 million or $0.08 per diluted share compared to a net loss of $50,000 or $0.00 per share for the first quarter of 2018. Weighted average shares used to compute diluted net income per share were $19.6 million and $18 million for the first quarters of 2019 and 2018, respectively.

First quarter adjusted EBITDA came in at $2 million compared to adjusted EBITDA of $100,000 in the first quarter of 2018. Our adjusted EBITDA margin was 5% in the first quarter of 2019 compared to 0.4% in the first quarter last year. As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

Let me now turn to a review of our 2019 revenue guidance, which we updated in our earnings release this afternoon. For 2019, we now expect total revenue in the range of $180 million to $182.5 million, which represents growth of 25% to 27% year-over-year compared to revenue of $143.8 million in 2018. This revised outlook compares to our prior revenue guidance range of $173 million to $175.5 million. Our 2019 total revenue guidance includes two updates. First, stronger than expected revenue in the first quarter related to increased volume from the new contract with a large commercial payer that went into effect in July of 2018 and second the impact of our adoption of the accounting standard related to leases, which is estimated to be approximately $6 million or approximately 4 percentage points of contribution to total revenue growth year-over-year. Our prior guidance range had assumed rental units we sold during the second, third and fourth quarters of 2019 would continue to be amortized over a period of up to 10 months. And as we move through the year, many of those rental agreements would have extended into the fiscal year 2020. Under ASC 842, we recognize all of the revenue upon commencement of the new rental agreement and $6 million of the $7 million total increase in our full year 2019 guidance is the impact of the adoption of this new lease standard.

The line item components of our updated 2019 total revenue guidance, which calls for growth of 25% to 27% year-over-year includes the following assumptions. Sales revenue will be in the range of $155 million to $157 million compared to sales revenue of a $130.2 million in 2018. The sales revenue guidance range includes the impact of the reclass of garments revenue to rental revenue. Rental revenue will be in the range of $25 million to $25.5 million compared to rental revenue of $13.6 million in 2018. The year-over-year increase in rental revenue for 2019 is expected to be driven by the impact of the adoption of ASC 842 representing approximately half of the increase in rental revenue for 2019, the reclassification of garment revenue to rental revenue that was previously reported in sales revenue representing approximately one quarter of the increase in rental revenue for 2019 and operational growth of 20% to 22% over 2018 rental revenue representing approximately one quarter of the increase in rental revenue for 2019.

By product, our 2019 total revenue guidance range assumes sales of our Flexitouch products increased approximately 25% to 27% year-over-year in 2019. Sales of our Entre/Actitouch products increased approximately 24% year-over-year in 2019. In terms of the anticipated contribution of our new products, we continue to expect Head and Neck sales in the low to mid single-digits as a percentage of total revenue. And we continue to expect sales of Airwear to be immaterial in 2019.

Lastly, for full year 2019, we expect our gross margin to remain in the low 70% range. Our adjusted EBITDA margin is now expected to be in the range of approximately 13% to 14% compared to 13% previously. This adjusted EBITDA range assumes stock compensation expense of approximately $10 million, approximately $1 million of expense related to the planned move to our new corporate headquarters in the third quarter of 2019 compared to a prior estimate of approximately $2 million. By way of reminder, the $1 million of expense is comprised of approximately $400,000 of moving expenses, which will only impact our full year 2019 P&L and the remaining expense comes from accelerated depreciation on our current facility and higher rent expense 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

Thank you, Brent. Our performance during the first quarter marks a promising start to the year and we are raising our full year revenue guidance in part to account for the stronger than expected revenue results that we were able to achieve. Looking ahead, we're confident in our ability to deliver strong revenue growth in 2019 as we continue to expand our field sales team, drive increased productivity by focusing our reps on the highest diagnosing accounts in the lymphedema market and expanding their penetration in the VA and benefiting from the broad in-network coverage that we've obtained for our products from commercial insurance payers.

Furthermore, we continue to see ample opportunity and important tailwinds that will enable us to achieve sustained growth over a multi-year period. As I mentioned earlier, we entered the year with 2,300 high diagnosing facilities in the US that are not currently customers of Tactile Medical as of the end of 2018. Based on our latest analysis of claims data, we also estimated 11% annualized compounded growth in the number of patients diagnosed with lymphedema over the last five years. And more broadly, we continue to see mounting qualitative evidence of the increasing awareness of lymphedema and its treatment. In 2019, we look forward to demonstrating our commitment to leadership in the more than $4 billion US lymphedema market as we continue to expand our share and deliver high-quality products and service to our patient and clinician customers. Thanks to our employees for their hard work and dedication and to everyone on tonight's call for their interest in Tactile Medical.

Operator, we will now open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And your first question comes from Chris Pasquale with Guggenheim. Your line is open.

Chris Pasquale -- Guggenheim -- Analyst

Congrats on another great quarter, guys.

Gerald R. Mattys -- Chief Executive Officer

Thank you, Chris.

Chris Pasquale -- Guggenheim -- Analyst

My first question is on the guidance update here. So $6 million of the $7 million increase is accounting related and you beat by about $1.5 million here in 1Q after backing out the accounting change. So it doesn't seem like you're really assuming that the extra strength you saw here in the first quarter continues over the balance of the year giving yourselves credit for that continued momentum.

Gerald R. Mattys -- Chief Executive Officer

I would say your math is correct, Chris, that in fact $6 million of the $7 million is related to the accounting change in our estimates of that. We did see better than expected demand volume from a large payer. And as you may remember from our past calls, we're unsure of how quickly that that payer would come up to speed and give us that additional volume. So we're taking about $1 million of that volume and adding it into our guidance for 2019.

Chris Pasquale -- Guggenheim -- Analyst

Okay. And then, Jerry, can you provide any update on the legal action that was initiated back in the first quarter, the qui tam suits from one of your competitors, anything you can say there about where that stands?

Gerald R. Mattys -- Chief Executive Officer

Sure, Chris. I'll just reiterate what we've said previously and then let you know where we are today. As we discussed in the 10-K, we were served with a sealed complaint in the US District Court, Southern District of Texas on February 13th. The suit was brought by a competitor and the US declined to intervene or join the suit. That suit was unsealed March 20th of this year. We continue to believe the allegations are without merit and we will vigorously defend ourselves. In fact, we filed a motion to dismiss the suit on April 5th of this year. But as per additional details, our policy is not to discuss details of outstanding litigation until we get a little further in the process.

Chris Pasquale -- Guggenheim -- Analyst

Understood. There was one particular aspect of that complaint, which related to your network of in-home trainers. Maybe it's worth just spending a minute on that particular operating structure. Your confidence in its legality and why it's important to the business? Thank you.

Gerald R. Mattys -- Chief Executive Officer

Yeah. Chris, we're not going to discuss any of the single items that were brought up in the litigation. We don't believe those allegations have any merit and we're certainly looking forward to the opportunity to present that case.

Operator

Your next question comes from J.P. McKim with Piper Jaffray. Your line is open.

J.P. McKim -- Piper Jaffray -- Analyst

Hi, good afternoon. Thank you for taking my question. I just want to start first with the changeover to the rental, the accounting change. Firstly, why now -- does it have anything to do with customers, the payers, I guess, requiring more and more rentals -- rental period first before they give it to the customer? And does it affect the sales reps compensation plan in any way that would affect their behaviors at all?

Brent A. Moen -- Chief Financial Officer

Hi, J.P., it's actually Brent. I'll take the first part of that question and Gerry can add on. But as it relates to why did we adopt the accounting change now, it was actually required for us, effective January 1, 2019. So just to take you back a bit, in the middle of 2018, we became a large accelerated filer, which accelerated a couple adopting items relative to new accounting standards out there. ASC 842 was one of those items that accelerated for us, so first quarter became the first quarter in which we were required to adopt it. And then to follow on to that, quite honestly, it doesn't change anything operationally within our organization at all, doesn't change how we fundamentally approach our business from a revenue and sales perspective, nor does it change the compensation elements relative to our sales team.

Gerald R. Mattys -- Chief Executive Officer

Yeah. I would just add J.P., it did certainly have a very positive impact on revenue. So reported revenue up 40% for the quarter, but stripping the accounting change out, we were still up 30% on the base business. And as Brent said, the base business is unaffected by this accounting change.

J.P. McKim -- Piper Jaffray -- Analyst

Got you. That's helpful. Then I wanted to ask on, you made an interesting comment around the large payer that flipped in the network, but they also I assume, they've got a whole Medicare advantage book of business. So you guys now can access those Medicare patients within that plan. Does that plan have the same restrictions as the Medicare LCD or does this now allow more Medicare patients through that large payer to get the Flexitouch, if that makes sense?

Gerald R. Mattys -- Chief Executive Officer

It certainly makes sense. I would say that each of the commercial payers has a choice as to whether they want to follow their own or Medicare's requirements for putting a patient on one of our products. I will say that our Medicare business was up in the first quarter and up sizably. So we were very excited about having this new payer on-board. It did give us access to more of the Medicare advantage patients that they had. And I think you see that reflected in our Medicare business.

J.P. McKim -- Piper Jaffray -- Analyst

Got it. Thank you.

Operator

Your next question comes from Margaret Kaczor with William Blair. Your line is open.

Margaret Kaczor -- William Blair -- Analyst

Hey, good afternoon, everyone. Thanks for taking the questions. The first one from me is maybe a little bit of a focus on the VA, which I think was roughly about 20% of total sales this quarter. Still showing some nice growth, but down maybe from 23% in the year ago period. Can give us a little bit of color how much of that is because of the change in rev rec as that maybe changed the mix? And then maybe some more detail around the sales within that channel. So the Flexitouch Plus having the first kind of full quarter impact within there maybe gaining momentum and then some of the strategy around the tertiary VA centers that you guys referenced on the last call?

Gerald R. Mattys -- Chief Executive Officer

Yeah. Hi, Margaret. Thanks for the question. Our Medicare business was up again this quarter, which we expected and we're excited to see it did represent 20% of sales instead of the 23% last year. You may remember last year, our first quarter revenue was up 73%, so we have a bit of a tough comp here in the VA channel specifically last year being so successful. We did see higher than our growth rate for the channel in shipments and did see some ASP drop by signing the new federal supply schedule contract that we did in the third quarter of last year. So volumes still ticking along pretty nicely. We did see a little price adjustment, which we anticipated as part of our plan for this year and it's I think reflected in our guidance for the 2019 total.

Margaret Kaczor -- William Blair -- Analyst

Okay. And then in regards to maybe some of the strategy looking at other tertiary VA centers outside of the VA hospitals. Have you guys moved forward there? Any additional data that you guys can give us in terms of the size of the scale of those centers relative to kind of the more single VA department, so let's say within the hospitals or -- how they may compare to a high diagnosing clinician?

Gerald R. Mattys -- Chief Executive Officer

Yeah. It's good commentary. We still see the VA as a terrific growth opportunity for us. Strategically, the use of VA sales specialists are helping us to penetrate deeper into the hospitals that we're already having relationships with and give us an opportunity to get on to those hospitals where we have yet to get an order and there still are some of those out there. We're -- and I'll come back to that in a minute. Regarding the CBOCs or the community-based outpatient clinics, we didn't see a big change in Q1 as to where those orders were coming from. So about the same proportion as we saw late in the year last year. I will say that in the VA itself, we saw an uptick in our Head and Neck business, which is something we did not see a year ago. So that I would attribute to our VA specialists helping our local reps target what I would call new call points within the VA. So whether they're getting on to surgeons -- head and neck surgeons at the VA, whether they're getting to speech therapists in the VA, that's where we're having some success that we didn't have a year ago.

Margaret Kaczor -- William Blair -- Analyst

Good. And then just maybe last one from me. You referenced the sales team this quarter and seeing some good impact from those folks that maybe are coming on. Can you give us any color in terms of how those new reps are ramping? When we should think about productivity? And then the hiring, you hired another 10 folks sounds like in the first quarter that if you think about that, are you seeing more good candidates come forward and so maybe you have additional flexibility above the 20% based on the typical -- the folks that are coming and applying for Tactile? Thanks.

Gerald R. Mattys -- Chief Executive Officer

Yes. Thank you. On the sales team expansion, if you look back a year to the end of the first quarter of 2018, we were just over 160 people in the field. We are now up over 210. So we've added 50 to that field organization and that 50 is coming up to speed at varying rates of productivity. Many of those hires were in the last two quarters of last year, so we really expect the biggest impact in the last two quarters of this year and the first two of 2020. As to the challenge or the opportunity of hiring more, I will say that because of where our economy is, hiring people is harder than it's ever been, frankly. The good news is we were able to identify 10 of what we think are really top-notch additions to the sales organization in the first quarter and we are actively looking for another 20 on top of that. So we continue to try to drive expansion of our field sales team as one of the key drivers of our growth and have put a lot more resource behind frankly doing that hiring. Compared to a year ago, we are much more -- putting much more effort into this hiring process because of the competitive nature of employment in our country.

Operator

Your next question comes from Jason Mills with Canaccord Genuity. Your line is open.

Jason Mills -- Canaccord Genuity -- Analyst

Hi, Jerry and Brent. Thanks for taking the question and congrats on a great start to the year. Can you hear me OK?

Gerald R. Mattys -- Chief Executive Officer

Yes Jason, thank you for that.

Jason Mills -- Canaccord Genuity -- Analyst

Super. So just a question about as we look forward and perhaps to help us all model. A couple of things I took note of. One is obviously this accounting change is going to be perpetual and you've added the other revenue $6 million to $7 million or so for the balance of the year. You also said that it's not changing the way your sales force -- sales reps are incentivized or how they produce within your system. So I presume while you haven't given 2020 guide, I want to ask about it. As we think about your -- as we think about our models for 2020 and beyond relative to 2019, it sounds like there shouldn't be much change as it relates to this accounting change in terms of how we think about growing your business in our model. Is that a fair assumption?

Gerald R. Mattys -- Chief Executive Officer

So, we're not ready to give guidance on 2020 quite yet, Jason. I think our guidance that we talked about today was really around '19, driving revenue 25% to 27% year-over-year. A piece of that accounting change will continue onward into 2020 and some of that accounting change will fall off. In other words, we've got a little bit more that we needed to share as you rebuild a model mid-year in terms of what the puts and takes are around that particular dynamic. So, it hasn't really changed our basic view of the future. We still see ourselves as a 20% plus grower on the top line with strong gross margins in the 70% range and improving profitability, which we've been harping on now for the 2.5 years we've been a public company.

Jason Mills -- Canaccord Genuity -- Analyst

Okay. So, maybe we'll take it offline, but I think it's fair that everyone listening to the call would want a sense for the year-over-year comps that are going to be faced in the optics of the growth that are going to be reported when we get to these quarters in 2020. And so I'll ask my next question and then maybe if you'd like to chime in on any other commentary around that, I'm sure everyone would appreciate that. But, I guess just secondly, congratulations on the early success with the large payer that you added, clearly they're ramping a little better than what you'd guided to. As we think again about moving forward, it sounds based on the tenor of your voice and your guidance that you expect to continue to penetrate this large payer and continue to reap the benefits of having them in network. Would you face any difficult comps as we look into 2020 relative to that progress with that payer in particular in 2019? Or do you think that the opportunity within that payer will extend for several years and we should again think of you as that 20% grower, generally speaking, as it relates to that payer's impact as well? Thanks, Jerry.

Gerald R. Mattys -- Chief Executive Officer

Thanks, Jason.

Brent A. Moen -- Chief Financial Officer

So Jason, hi, it's Brent. So just let me add a little clarification to your initial question relative to what the impact of ASC 842 has on 2020. I think what the messaging was is that ASC 842 does put in place acceleration of recognizing revenue, so we spread -- historically, we spread those -- the recognition of that revenue over the life of the contract under ASC 842. Now, we recognize it upfront. So that's one aspect that will perpetuate itself as you point out. The piece that actually is going to be unique is the piece related to contracts that are in place as of December 31, 2018. Those contracts actually will continue to be recognized over the remaining life of their lease. And to your point I think the question you were asking is, well, does that put a pinch on 2020? And the answer to the question is yes. There -- because of the acceleration in how the accounting standard was adopted, roughly about $5.1 million of revenue will not be repeating itself in the 2020 period.

Gerald R. Mattys -- Chief Executive Officer

Now, back to your second question, Jason, around do we expect a long runway with this payer. We do. And I think the good news about the contract we signed last year is they've come up and given us access to more of their plans faster than we've previously experienced. It's a little hard to predict how the volumes will flow from those plans, which is why I think we're willing to pass on the extra from Q1 into our guidance for the rest of the year. But we'd certainly expect that we will continue to service that account and continue to expand our business with them over time.

Jason Mills -- Canaccord Genuity -- Analyst

Great. Thank you, both.

Gerald R. Mattys -- Chief Executive Officer

You bet.

Operator

(Operator Instructions) And your next question comes from Mitra Ramgopal with Sidoti. Your line is open.

Mitra Ramgopal -- Sidoti -- Analyst

Yes, hi. Good afternoon. Jerry, just wondering in light of the sales force expansion you're undertaking, I believe you mentioned earlier you're in about 50% of the high diagnosing facilities. And I was just wondering, if you could give us a sense of what that number was maybe a year or two ago and how do you see that number increasing over the next few years?

Gerald R. Mattys -- Chief Executive Officer

So the high diagnosing facilities, Mitra if I'm understanding your question correctly, those facilities vary depending upon when we pull the claims data. So in other words, the -- when we did the data pull in the middle of 2016, there were fewer high diagnosing clinician groups than when we did the data pull at the end of 2018. So there's not really an apples-to-apples comparison I can give you. We came into 2018 thinking we had penetrated about 40% of then existing high diagnosing accounts and we left 2018 thinking we were a little -- we were right around 50%. So we picked up another 10%. The problem is the denominator increased as well. So the number of accounts increased, now it's 4,700 high diagnosing facilities in the US, almost half are doing business with us today, which means that 2,300 aren't. So we see this as a very fertile call point for us as we continue our expansion into this $4 billion market opportunity.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Yeah. No, that's very helpful. And then just on the peer mix, I know you've talked about increased coverage with commercial payers and obviously you have a focus on the VA. I was just wondering, how you -- if you -- we should expect any meaningful change in the payer mix relative to what we are seeing today?

Gerald R. Mattys -- Chief Executive Officer

We -- I don't -- we don't really see much change going forward other than the little uptick we talked about with Medicare. That was up substantially in the first quarter, couple of million dollars year-over-year, but we don't -- we think the mix is about correct. The reason mix keeps coming up is it's hard to predict where it will be in any given quarter. So pricing is impacted by which channel that we're in. As we've mentioned in the past, the VA has most favored nation pricing. So when the VA business is up, our gross margin experiences some pressure. The flip side of that is Medicare is actually one of our better payers. So we get an opportunity for a little bit better gross margin tailwind rather than headwind. So that's what -- we think the mix is going to be roughly the same over the year. It can vary quarter-to-quarter.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. That's great. Thanks again for taking the questions.

Gerald R. Mattys -- Chief Executive Officer

You're welcome.

Operator

We are currently showing no more participants in the queue. That does conclude our conference for today. And thank you for your participation.

Brent A. Moen -- Chief Financial Officer

Thank you.

Duration: 52 minutes

Call participants:

Gerald R. Mattys -- Chief Executive Officer

Brent A. Moen -- Chief Financial Officer

Chris Pasquale -- Guggenheim -- Analyst

J.P. McKim -- Piper Jaffray -- Analyst

Margaret Kaczor -- William Blair -- Analyst

Jason Mills -- Canaccord Genuity -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

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