I would now like to turn the conference over to your host, Mike Cavanaugh, Investor Relations. You may begin.
Good afternoon. Thank you for joining the Electromed Earnings Call. Earlier today, Electromed, Inc. released financial results for the third quarter of fiscal 2026. The press release is currently available on the company's website at www.smartvest.com. Before we get started, I would like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place any undue reliance on those forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.
Please refer to the company's SEC filings for further guidance on this matter. Joining me on the call today are Jim Cunniff, Electromed's President and Chief Executive Officer, and Brad Nagel, Chief Financial Officer. As on previous calls, Jim will provide operational highlights from the quarter. Brad will then review the financials, and we will close with a question-and-answer session. With that, I will now turn the call over to Jim Cunniff, President and Chief Executive Officer of Electromed.
Good afternoon, everyone, and thank thank you for joining us today. I'm excited to share our third quarter results. Let me start with the headlines. Q3 marks our 14th consecutive quarter of year-over-year revenue and profit growth. We delivered revenue of $18.6 million, representing 18.4% growth compared to the prior year. This performance reflects the strength of our commercial execution and the growing recognition of SmartVest as the leading solution for airway clearance. Growth was broad-based across our business. Our flagship home care segment grew a robust 19%. Our distributor revenues increased 3%, driven by consistent demand from our DME partners. Hospital grew 43% over prior year and rebounded after a slow second quarter. This diversified growth demonstrates the strength of our market position and the effectiveness of our multi-channel strategy. Even more impressive is our record bottom-line performance.
Operating income increased to $3.8 million in the third quarter, a 76% increase versus prior year. Diluted earnings per share came in at $0.35, up 67% versus the prior year. From a balance sheet perspective, we maintained a strong cash position of $17 million. As you may recall, our board approved a $10 million stock repurchase authorization in the first quarter, reflecting our confidence that Electromed represents a sound investment. We slowed repurchasing activity in Q3 as we assess the recent macro market dynamics. We remain committed to finding ways to deliver value back to our shareholders. Looking at our results, it's clear that the business model Electromed has built is working well.
Our focus on airway clearance for the home care market, coupled with our productive sales and fulfillment teams, which handle the process from prescription to delivery of the vest to the patient's home, sets us apart in the market. Our business model is a strong foundation for continued future growth. As we have said many times, bronchiectasis is underdiagnosed and airway clearance is underprescribed. That said, let me turn to what I believe is the most exciting part of our story, the underserved bronchiectasis market. This represents the primary strategic opportunity for Electromed, which we are executing to capture. The numbers tell a compelling story. Today, approximately 923,000 patients in the U.S. are diagnosed with bronchiectasis, yet only 16% are currently benefiting from high-frequency chest wall oscillation therapy. Think about that.
Nearly 800,000 diagnosed patients could experience the life-changing benefits from our SmartVest system but aren't receiving this therapy today. Equally compelling is that it is estimated that over 4 million additional individuals may have undiagnosed bronchiectasis. This highlights not just a large commercial opportunity, but the need for continued education and awareness about this disease. To seize this opportunity, Electromed launched our innovative Triple Down on Bronchiectasis campaign, which promotes a powerful three-pronged treatment paradigm that's changing how clinicians think about bronchiectasis management. Number one, Clear Airways First with SmartVest to effectively remove mucus, which is the fuel for future infections. Second, treat the patient's infection with antibiotics. Third, help reduce inflammation. This approach helps break what we call the vicious vortex, where chronic infection, persistent inflammation, and damaged airways continuously worsen, leading to progressive lung disease and reduced quality of life for patients.
The campaign is delivering results. Our digital promotion of the Clear Airways First messaging has been running for 18 months and has generated over 2 million impressions and generated more than 65,000 visits to our educational landing pages. We're reaching clinicians where they are and changing the conversation around bronchiectasis treatment. At the same time, our clinical team is out in the field making a difference. In the 3rd quarter alone, they spoke at four regional respiratory conferences promoting what we call the ABCs of bronchiectasis. Always be clearing the airways first with SmartVest. We're also seeing success with peer-to-peer education. We conducted four virtual webinars featuring respected pulmonologists, which were attended by over 375 clinicians. When physicians hear from their peers about the clinical benefits of SmartVest, it moves the needle. Our presence at key conferences continues to expand our reach.
The SmartVest team attended three national conferences in the quarter, ensuring we're visible and engaged where bronchiectasis specialists gather. We've also been doing important research to understand where the gaps are in patient care. We completed a manuscript based on the data from the NTM Bronchiectasis Research Registry, which found that 58% of qualifying patients were not prescribed HFCWO therapy despite meeting clinical criteria. This gap represents an obvious opportunity for early intervention, and our team is working aggressively to close it, in part through our Sip On This campaign, aimed at driving conversations with high bronchiectasis diagnosing physicians who aren't yet prescribing HFCWO. Beyond clinical education, we're also innovating on the technology and process side to make it easier for clinicians to prescribe SmartVest and for patients to receive therapy faster. Our Smart Order ePrescribe solution is transforming how clinics submit orders to our fulfillment team.
This is particularly timely given that CMS recently finalized new rules requiring covered entities to modernize their processing of orders and phase out faxes by May 2028. Our ePrescribe solution already meets CMS requirements for electronic signatures and processing of orders, positioning us ahead of this industry shift. The introduction of the ePrescribe solution has been a success. In the third quarter, over 40% of orders came through our Smart Order solution, resulting in a five-day reduction in average days to ship versus fax orders. The number of prescriptions processed through the system is only anticipated to increase. That means patients get their therapy faster and clinics benefit from improved workflow. Increasing payer coverage remains a primary strategy to ensure patients benefit from our technology. I'm pleased to report that we now have 86% of covered lives in the U.S. under contract who could benefit from SmartVest.
The covered lives we've added over the past 18 months have resulted in over 50 referrals where we would have otherwise not been able to recognize revenue. Each one of those represents a patient whose life we can improve. On the commercial side, we ended Q3 with 58 direct sales reps. While this is flat versus the second quarter, I'm happy to report that we have since added four additional sales reps to our roster, which is now up to 62, maximizing our market coverage. Before I hand the call over to Brad, I want to touch briefly on our operational capabilities, which are yet another significant competitive advantage, especially in today's environment. Our manufacturing optimization plan initiated last year is complete. We physically restructured our manufacturing facility to improve our production process and provide capacity for future growth.
I'm particularly proud that our products are manufactured in the United States. Electromed is a U.S.-based company with operations and product assembly located domestically, and 99% of our net revenues are generated in the United States. While not without risk, we have continued to maintain our strong track record of on-time delivery to our customers and sustain our robust gross margins, even during the current uncertain global environment. With that, I'd like to turn the call over to Brad for a review of our financials. Brad, over to you.
All amounts I'm about to discuss are for the three months ended March 31st, 2026, Q3 FY 2026, and compared to the three months ended March 31st, 2025, Q3 FY 2025. Net revenues grew 18.4% to $18.6 million from $15.7 million. Revenue in the direct home care business increased by 18.6% to $16.7 million from $14.1 million. The increase in revenue was primarily due to an increase in direct sales representatives and higher net revenues per sales representative. Throughout Q3, we averaged 57 home care direct field sales representatives. The annualized home care revenue per weighted average direct sales representative in Q3 was $1,168,000, exceeding the target range of $1 million-$1.1 million for the second straight quarter.
Non-home care revenue was $1.8 million. Hospital revenue grew 42.5%, totaling $1.0 million. Home care distributor re-revenue was $0.7 million, an increase of 2.7%. Other revenue of $0.1 million declined 40.7%. Gross profit increased year-over-year to $14.6 million or 78.8% of net revenues from $12.2 million or 78.0% of net revenues. The increases in gross profit dollars and gross profit percentage were primarily a result of increased overall revenue and higher net revenues per device. Selling, general, and administrative, or SG&A expenses were $10.5 million, representing an increase of $0.7 million or 7.2%.
The increase in the current period was primarily due to increased salaries and incentive compensation related to the higher average number of sales headcount and higher overall compensation costs. Operating income was $3.8 million, or 20.3% of net revenues, compared to $2.1 million, or 13.6% of net revenues. The 76% increase in operating income was primarily due to the increases in revenue and gross profit. Net income increased by 58.8% to $3 million, or $0.35 per diluted share, compared to $1.9 million or $0.21 per diluted share.
As of March 31, 2026, Electromed had $17 million in cash, $28.3 million in accounts receivable and no debt, achieving a working capital of $40 million and total shareholders' equity of $49.2 million. The cash balance reflects an increase of $1.7 million for the nine months ended March 31, 2026, compared to a decrease in cash of $0.8 million in the nine months ended March 31, 2025. The increase in cash for the nine months ended March 31, 2026 was driven primarily by positive operating cash flow of $6.7 million, partially offset by share repurchases of $3.9 million of Electromed common stock.
While the Q3 growth rates of 18% for revenue and 76% for operating income represent recent quarterly highs rather than a new normal expectation, we remain confident in our ability to continue to deliver double-digit revenue growth, coupled with expanded operating leverage as we close out fiscal year 2026 and continue to help more patients to breathe easier into the future. With that, we'd like to move to the Q&A portion of the call. Operator, please open the call to questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask to please limit to one question and one follow-up. Your first question comes from the line of Kyle Bauser with Titan Partners. Please go ahead.
Hi, Jim and Brad. Thanks for taking my questions, and congrats on another really impressive quarter here. It sounds like a key contributor to the strong sales growth has been headcount additions, and I know there's a ramp-up period for reps, you've still managed to come in above the targeted range. Have you been adding territories or regions, or have you been splitting existing territories in half? Just kind of wondering how you've been layering in reps.
Well, Kyle, it's good to hear your voice, thanks for the question. You know, as we had indicated during our prepared remarks, we really on average had about 57 reps this past quarter. Given the strong performance, that's really attributable to really the reps that we had in territory, coupled with the fact that I think we did have some positive tailwinds relative to our insurance mix, which really, you know, helped benefit the revenue. That being said, you know, we ended the quarter with 58 reps. As I've been indicating, you know, all year, we intended to have 61 territories by the end of our fiscal year. We're now at 62 territories filled.
We're actually starting to add reps as we start to conclude Q4 and start to look at the horizon for our next fiscal year. In the next fiscal year, you know, we intend to add probably four to five additional reps, and we're on that journey right now.
Okay. Appreciate it. That was gonna be my follow-up, was kind of what is the upper bound in terms of headcount? Appreciate that. I guess, for my follow-up, do you still believe BRINSUPRI has been a net positive for SmartVest, given the increased awareness around bronchiectasis and what that's been able to do?
Yeah, we do. You know, I think the key thing for everybody on the call just to remember is that, you know, bronchiectasis is a chronic and irreversible disease. Certainly, you know, when we look at it, the drug addresses inflammation, which is part of that vicious vortex that I mentioned during the call. Fundamentally, you know, these are patients that have mucus that is building up in their airways, and they need to have something to remove that mucus, which is the future fuel for future infections. That's really where we come into play. You know, we're part of that care continuum where we're actually removing the mucus. The BRINSUPRI drug is helping to address inflammation, and that's really to stabilize the inflammation.
Certainly, the drug has been a tailwind due to increased patient and provider awareness, you know, which has been terrific, I think, and it's raised all boats that are in this market. The drug is an adjunct. It's not a replacement for SmartVest. You know, that's further validated by the fact that though the guidelines have not been published by CHEST has actually issued preliminary guidelines, and part of the care continuum is airway clearance. I think that's very promising. We're waiting for those results to be published. Those are really to help give clinicians some guidelines as to how to treat bronchiectasis patients. Heretofore, there really hasn't been any industry-wide guidelines here in the U.S. to treat bronchiectasis patients, we're excited about that.
Okay. Got it. No, that's helpful. Appreciate it. Congrats again on the results, particularly around earnings growth. I'll jump back in queue.
Thanks, Kyle.
Your next question comes from the line of Ben Haynor with Lake Street Capital Markets. Please go ahead.
Good afternoon, gentlemen. Thanks for taking the questions. First off for me, just on the new sales reps, can you kinda remind us on how quickly it typically takes to get ramped up to productivity in a new territory and whether some of these folks are entering, you know, kind of existing territories in which you've had turnover for, you know, voluntary or involuntary reasons?
Yeah. I think there's two parts to that question. Usually the ramp-up is anywhere from four-six months, Ben Hayner. We're obviously always looking in ways to collapse that timeframe, but that's a pretty good indicator of how long it takes for somebody to get their feet and, you know, get acclimated within, you know, this market and get acclimated to their new customers. When you take a look at, you know, the 61 reps that we had projected for this year, some of those were extension territories for fiscal year 2026. However, we're right now at 62 reps, as we're looking into next year, we're looking to add four to five additional territories. We're at 62 right now, and we're already on that journey. We're really excited about that.
You know, this past quarter, we did have a couple of people who actually retired, and so, you know, that's kind of a something that you can't project necessarily. Obviously, you know, we're always gonna have churn to some extent within our sales team, but we wanna make sure that our territories are filled because this still is largely a clinical sale and you need to have people in the market talking to pulmonologists, identifying patients that can benefit from our technology. We feel like our reps do just a outstanding job with that.
Okay. That's helpful. Then just, you know, considering the ABC, Always Be Closing mode, the 375 clinicians that you mentioned attending, the various events that you have, is there a way that you can kind of tell or quantify when and whether they ultimately become prescribers?
That's, I mean, we track it. A lot of it's just awareness right now. You know, part of the challenge that we haven't been able to quantify, you know, of that 375 participants that we had, in, you know, some of the peer-to-peer educational conferences, you know, what's the conversion rate on that? A lot of it is, you know, sometimes some of these clinicians, and it can be a mix of pulmonologists and other specialties, they're really getting exposed to this disease state in many cases, and the different treatment options that are out there. You know, we're helping to create that awareness in addition to the drug that has recently been introduced in the market, as well as some of our other competitors that are out there.
ATS, which is one of the large conferences for the year, is actually happening, you know, this week, that's another opportunity for us to touch really clinicians who are primarily like on the clinical side that are doing studies, et cetera. We're very excited about continuing to highlight our product technology and the difference it can make in patients' life and giving them the awareness to our product.
Excellent. That's helpful. Thanks for taking the questions, gentlemen, and congrats on the quarter.
Thank you.
There are no additional questions at this time. I would like to turn the floor back over to Jim Cunniff for closing comments.
Thank you, operator. You know, for everybody that's on the call, you know, in summary, our fiscal third quarter Electromed is firing on all cylinders. We've delivered strong financial results and executing against the largely untapped bronchiectasis opportunity with precision and purpose. Our team is focused, our strategy is working, and we have significant runway ahead of us. I wanna thank our exceptional team for their dedication, our customers for their trust, and our shareholders for their continued support. We look forward to building on our momentum in the quarters ahead. With that, thank you, everyone.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.