LUNG - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to Pulmonx Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to the first speaker today, Elizabeth Sparicio, Investor Relations. Please go ahead.

Good afternoon, and thank you all for participating in today's call. Joining me from Pulmonx are Steve Williamson, President and Chief Executive Officer; and Mehul Joshi, Chief Financial Officer. Earlier today, Pulmonx issued a press release announcing its financial results for the quarter and year ended December 31, 2024. A copy of the press release is available on Pulmonx's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including without limitation, those relating to our operating trends, commercial strategies, and future financial performance, the timing and results of clinical trials, expense management, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed with the SEC on November 1, 2024. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call contains time sensitive information and is accurate only as of the live broadcast today, February, 19, 2025. Pulmonx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Steve.

Thanks, Elizabeth. Good afternoon, everyone, and welcome to our fourth quarter and full year 2024 earnings call. Here with me is Mehul Joshi, our Chief Financial Officer. I'm pleased to report that we closed the year with worldwide sales of $23.8 million in the fourth quarter of 2024 reflecting 23% growth over the same period last year. Our performance was driven by record U.S. sales of $15.9 million representing 16% growth against the high year-over-year comp, as well as record international sales of $7.9 million representing 42% growth year-over-year. This enabled us to deliver full year 2024 worldwide revenue of $83.8 million representing 22% growth over 2023. Our strong results reflect the substantial progress we made in 2024 across several key commercial initiatives. Specifically, we continue to opportunistically expand our U.S. account base, adding 52 new centers in 2024 and ending the year with 283 active accounts in Q4. We remain focused on physician and patient education, broadening our marketing presence and targeted direct to patient advertising, while partnering with organizations like the American Lung Association to build awareness of the benefits of

Thank you, Steve, and good afternoon, everyone. Total worldwide revenues for the three months ended December 31, 2024 was $23.8 million, a 23% increase over the prior year period, and also an increase of 23% on a constant currency basis. Our performance was driven by strong execution of our strategy and adoption of

Thanks, Mehul. In summary, 2024 was a foundational year for Pulmonx, marked by robust growth over 20%, the launch of key efficiency programs like our LungTraX Platform, positive new clinical data from our AeriSeal CONVERT trial, and the advancement of our CONVERT II trial in Japanese post-market surveillance study. Our continued success reflects our ongoing commitment to improving the lives of our patients by helping them breathe better. Looking ahead, we have a strong balance sheet and remain confident in our opportunity, plans, and team as we build a promising future for patients with severe lung disease. I'd like to thank you all for your attention, and we'll now open the call for questions. Operator?

[Operator Instructions] And our first question will come from Frank Takkinen with Lake Street Capital Markets.

Thanks for taking the questions. Congrats on a really strong finish to the year. I was hoping to start with one around the guidance for 2025. I heard the comments around international strength in first half and then some of the growth initiatives that you've put in place throughout 2024, driving and acceleration in the second half. Can you maybe help quantify that a little bit on what we should expect from a growth rate first half versus second half as we build our models?

Yeah. Hey, Frank, this is Mehul. Thanks for your question. As you know, we don't really comment on first half growth versus second half growth, but we do expect the international business to grow really strongly in the first half of the year. As a result of some of the programs we've deployed in 2024, and then we'll expect it to turn to normal seasonality with a slowdown in Q3. In the U.S. we don't see a continued deceleration of the U.S. business. But as we deploy these pilot initiatives in full implementation, we'll continue to see growth in the first half, but we should see acceleration further acceleration of growth in the second half of the year.

Okay. That's helpful. And then maybe just a little bit more color on LungTraX. You've had the pilot out there for a little bit. I'm assuming there's been some valuable learnings so far. Maybe talk about some of the anecdotes you've heard from your centers of excellence or centers building towards becoming centers of excellence. What are you changing? What's working really well? And then what is that kind of what is that resulting in from kind of a utilization standpoint on a per center basis?

Sure, Frank. I'll take that one. So, what we found from the customers that are in our pilot or that have gone through our pilot that they like being able to passively find new patients. They like the concept of it and they like how it's working. I think the thing that was most interesting to me for this past quarter was, I wanted to make sure that the integrations, they went well and that the interface is easy to use and the customer feedback was positive in those areas and we've seen that. We've shown that we can actually plug in and transmit the CT scans from the PAC system, which was we had to get that handoff right and I am happy with where we landed on that. We have got a handful of active sites that are sending in scans right now and in general their results are similar to the data that came out at CHEST. And just to put that in a little bit of perspective, what the CHEST data said was 10% to 15% of patients with chest CTs were identified with radiographic emphysema. Now those patients have to go back through and they do a full workout and some fall out for smoking or other reasons, maybe they're not healthy enough for a procedure. So, there's really kind of a spectrum of outcomes though that we've seen with our pilot sites. The middle ones are kind of right in line with CHEST. We have one site and what's happening in those middle accounts is they're really sending in these lung cancer nodule cases and those are the CT scans that we're seeing or the lung cancer screening cases. Some are actually gone and broadened that and they're pulling all the CT scans out of their PAC system. So, that's car crashes or whatever reason that there is a CHEST CT in the system, they're pulling that. So, it's a much broader pool of data and we'll see less than 10% to 15% of those have radiographic emphysema. On the other side of that spectrum, we've got an account that's a very kind of focused pulmonary account where there's a good strong pulmonology department and a lot of those patients really fall into our sweet spot and are patients that are more likely to be former smokers or more likely to have lung issues and we see a higher rate in those. So, we've got our initial scans have come in, the data are looking like they are in line with what we saw at chest. It's still super early innings here, but it's very promising for us. Because of that, we've rolled that out to the sales force and we look to bring on more accounts here in the second quarter and then look to see the results in the back half of the year.

And our next question will come from Jon Young with Canaccord.

I just want to first start on just the OUS. I mean, it was up significantly quarter over quarter in Q4. I heard you say it was a broad-based strength in the business, but would you call it anything in terms of one time stocking orders and your geographies or any ASP changes. And then, as we think of next year and the strength that you think you'll see in the first half in the OUS business with Q4, a good jumping off point in terms of the model, and then I have a follow-up too.

Hey, Jon, this is Mehul. A lot of questions there. I'll try and answer as many as I can and remind me if I don't answer any other questions. So, I'd say there weren't really a lot of stocking orders in Q4. On the U.S. side, it was just a recurring business. We were really focused on our high-volume accounts in the quarter. That was our sales strategy. So, those were the accounts that drove a lot of the business, and that's what our sales teams called on. So, I wouldn't say there was a lot of stocking on the U.S. side. On the international side, also about the same answer, all of our European markets as well as our China market grew pretty extensively. We had very, very strong growth in Europe, and then we had a recurring order from our China distributor. As you heard over the last couple of quarters, our China business has been growing, and our distributor is doing a great job with additional sales reps and opening up new accounts and things like that. So, we don't expect that kind of a growth rate in 2025 that we hit in 2024 with the OUS business. But we do expect continued growth that's predictable in our OUS market, including China. We reset the base a little bit in China, but going forward, it'll continue to have some growth in that. What didn't I answer of your question?

You've got all my many questions. Thank you for that one. And then just as a follow-up, too, on the U.S., if you're thinking of next year on the second half acceleration, do you think that could overcome the normal seasonality we see in Q3? And how should we think of the balance of the Q3 seasonality versus the acceleration that you think you guys will see? Thank you again.

Yeah. So, just on the international side, we will see the typical seasonality. On the U.S. side, as you recall, seasonality has been up and down over the last three or four years. So, we believe that some of the initiatives that Steve mentioned will help maybe normalize some of the Q3 revenue seasonality for the U.S., but we'll have to kind of wait and see what happens in the summer season. But we do expect acceleration in the second half of the year on the U.S. side with the initiatives that we're implementing in the first half of the year, including what Steve just mentioned around LungTraX and some of the other marketing initiatives.

Hey, Jon, if I can add on to that real quick. So, if you think about 2024, it was a good learning year for us. What we did was we identified a lot of the growth drivers for this market and found ways to efficiently take advantage of them and capitalize and execute against them. So, if you think down the growth drivers that we identified in 2024, one was in the marketing area. We talk a lot about direct-to-patient advertising. One is in R&D and innovation. We're pushing forward with AeriSeal. I think LungTraX is really an R&D success story for us. Our ability to get that product out quickly, have it work well, and get good customer feedback is a big win for us in 2024 and will drive growth in the back half of 2025 We also had product enhancements that we did on our standard catheter, our Chartis Precision Catheter. We broadly rolled out a new catheter here in Q4. It's got a small premium over the prior catheter, and really what that does is it provides better visibility for the physician, better trackability down the scope channel and there's a new tip design on it that's designed to facilitate easier placement. And the goal of that innovation was really ease of use, make it easier for our customers to use, but also outcomes. If they have the ability to get the catheter in the right spot and not have the tip plugged up against the wall, they'll get better outcomes from their patients and the patients will get better outcomes. So, R&D and innovation were an area that we've really spent a lot of time on. Medical education, I talked about we doubled down on medical education. That should start to work its way through the funnel and we'll continue to do medical education in the back half of the year. One thing that I mentioned in the prepared remarks was our sales force structure. We're making some changes to our sales force structure based on the analytics that we've gotten to get more involved with some of these COPD physicians that are in the marketplace, getting them to identify better patients, more patients, the right patients and getting those through to StratX. So that's a big initiative for us. We identified kind of the call point and this administrative sale and expansion into a broader call point is an area. We started with that. I'd say we're still early innings there. One of the things that I found with that is that the call point sale is very connected to the LungTraX Detect sale. If people are interested in LungTraX Detect and building out programs that typically gets support from an administrative level. So, those two are really tied together. Our capital allocation, I think Mehul and his team have done a great job of making sure that we are allocating our money to key revenue growth drivers. We talk about geographic expansion. We've made some moves in China. As you've seen, they are starting to pay off for us. And just overall OUS execution in our core business has been another big driver for us. So, based on what we saw in 2024 and the changes in rollout that we've put in place, we expect to see these when efficiently executed in the first half of 2025 to pay dividends in the back half of 2025

And our next question will come from Larry Biegelsen with Wells Fargo.

Steve, you're guiding to 17% at the midpoint in 2025, but you expect 20% growth over the long term. Why is 2025 expected to be below 20% and when do you think you could get to the 20% growth?

Yes. So, the midpoint at 17% was really I think it's very credible guidance for us, Larry. We've got these programs where we've tested them in 2024. We're going to roll them out. It takes time once we roll them out to get the patients through that system. We've got to get them stood up and then get the patients through. So, we would expect to see that in the latter half of '25. We'd see a pickup here in the U.S. especially. And then going into '26, we should see a tailwind from those on top of our Japanese post approval study should be completed in approximately '26 as well as AeriSeal OUS launch in that timeframe. And then moving forward, AeriSeal launch in 2027. So, we've got a number of growth drivers. It's just in the first half of the year we wanted to be reasonable on our guidance, and make sure that we didn't get out of our skis before we initiated or executed these drivers.

That's helpful. And then on the OpEx guidance, I mean, if I look at the revenue guidance, it calls for incremental $13 million in sales at the midpoint. If I look at the OpEx guidance, it calls for incremental $14 million in spending. Hopefully, I'm doing the math right. Why aren't we maybe for Mehul, why aren't we seeing more leverage this year?

Yeah, I think at the midpoint, Larry, of the guidance on revenue, it's 17%. At the midpoint on expenses, it's 12%. So we still continue to drive leverage, right, as revenues grow faster than expenses. We are investing in clinical trials, as Steve just spoke about, both for CONVERT, as well as the Japan post-approval study. So as enrollment ramps up, we'll continue to spend more money on the R&D side. And R&D will grow significantly based on enrollment. We'll continue to get leverage on the SG&A side, where that'll grow significantly lower than the revenue guidance.

And our next question will come from Joanne Wuensch with Citi.

There's a lot of activity that you're doing right now to, what I would say, build the base to create the funnel. How are you measuring some of the investments that you are making, whether they are in new centers, new salespeople, or direct consumer campaigning?

Yeah, there's a number of different ways. Thanks for the question, Joanne. If we look at the direct to patient advertising, that's an area where we really look to see what happens with the advertising spend that we have as far as our ability to acquire patients and capture them. Typically, they come through our website. And so we continue to see significant growth through that web portal. And we measure that quite often. That's something that our marketing team spends a lot of time, making sure that we can continue to build mechanisms to track them through the funnel. As you know, once we get them and they go off to a COPD physician, sometimes we lose them. And then we pick them back up when they come out to a treatment center. So finding ways to make those connections are an area that we're spending some time. I believe as far as our new territory or our therapy awareness specialists, which I mentioned that we hired seven of those or we're in the process of hiring seven of those, we'll measure those based on the COPD community physicians and their efficiency sending in StratX. So right now, there's probably low single-digits of StratX come from the majority of the COPD physicians that are in the market. We'll measure what those look like moving forward to see if the utilization of this therapy awareness specialist is the right way to go. And if it is, then we'll continue to invest in that as an opportunity.

And our next question will come from Joseph Downing with Piper Sandler.

On the gross margin line, can you just provide a bit of detail around how you're thinking about the interplay between scale, inflationary effects, and geographic mix over the balance of the year? And then is there additional headroom for the gross margin line to expand beyond that 74% to 75% we've seen in the past few years’ kind of moving forward?

Yeah. Thanks for the question. So gross margin, as you're aware, is impacted by a number of things. It's production and then the geographic mix, as well as a number of our cost optimization initiatives. So as we think about geographic mix, we talked about the international business being very strong in the first half, U.S. business being very strong in the second half. So, the U. S. has slightly higher gross margins than the international business. So, you'll see gross margins fluctuate a little bit. And as I mentioned in the prepared remarks, our guidance is 74 for the year, but it should trend up over time in terms of the second half of the year. So, that's geographic mix. We do have some inflation built into our production plans. We do have quite a bit of inventory on hand, roughly nine months. So that will not impact 2025 purchases of raw materials or components, and we're actively monitoring all the tariff situation around that as well. So, there's a lot of moving parts, but we are confident in the gross margin guidance. And we do expect that over the longer term, our gross margin should increase, again driven by production volumes and geographic mix and some of the cost reduction initiatives that we put in place late last year that will then start to drive dividends in late in 2025 and 2026.

If I could just add on to that, if you look at our overall margin, one of the largest contributors is the overhead associated with our manufacturing. We manufacture in Northern California right now. And so, as we have production volumes increase, obviously that helps us considerably. So, over time, as our volumes continue to increase, we'd expect to see leverage on that margin line in the future. So, a little bit further outlook for you, but there are opportunities for growth there.

And then just one more. So, with hospitalizations running high right now as a result of strong flu and respiratory season, we're just curious what you're seeing in hospitals at the moment and whether you see this as an issue for procedures here in 1Q?

We haven't seen a whole lot of effect here. Right now, pulmonologists obviously spend a lot of time with these patients. And so, I haven't heard it bubbling up as a key issue. That said, when you've got patients that are in the hospital and they're getting CT scans, as they have pulmonary issues, then perhaps in some of our LungTrax accounts, it could be an opportunity to identify additional patients that might have gone undetected without it.

I show no further questions in the queue at this time. I would now like to turn the call back to Steve Williamson for closing remarks.

Thank you, Michelle. Again, I'm very pleased with our 2024 performance. I'm also excited about what we learned in 2024 and what it says about our future. I'd like to thank our Pulmonx employees worldwide for delivering a strong year and also for their continued dedication to fight every day for every breath, so our patients don't have to. Thank you all for your time and for joining us today.