Ladies and gentlemen, thank you for standing by and welcome to the Pulmonx Quarter Four 2021 Earnings Conference Call. At this time, all participants are in a listen-only. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Ms.

Lane Morgan [ph]. Ma'am, you may begin..

Thank you, operator. Good afternoon and thank you all for participating in today's call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer; and Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter and year ended December 31, 2021.

A copy of the press release is available on the company'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 positions of the Private Securities Litigation Reform Act of 1995.

Any statements contained on 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 and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development are based upon our current estimations 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 those 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 public filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q filed with the SEC on November 9, 2021.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 23, 2022.

Pulmonx Corporation 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 Glen..

Thanks, Lane. Good afternoon, everyone and welcome to our fourth quarter and full year 2021 earnings call. Here with me is Derrick Sung, our Chief Financial Officer. Today, I would like to share a few highlights and contextualize our fourth quarter results before turning to our outlook and strategic priorities for 2022.

Looking back on 2021, I'm very proud of the progress our team has made in an unquestionably challenging and unpredictable environment.

For the full year 2021, we delivered $48.4 million in worldwide sales, grew our business 48% over 2020 and achieved three consecutive quarters of record sales, all while executing on each of our commercial and strategic goals. Specifically, we increased our commercial footprint in 2021, growing our base of U.S.

treating centers 45% to 214 centers, enabling us to exceed our target of opening at least 200 centers by the end of the year. We met our sales force expansion targets, building out our U.S. sales management team to 9 region directors, adding 9 new sales territories in the U.S.

to bring our total to 54 and adding 6 territories outside the U.S., bringing our total international territories to 34. We secured 10 positive coverage policies predominantly within the Blue Cross Blue Shield Association, including Anthem and thereby added coverage for over 50 million lives across the United States.

We submitted in December 2021, our regulatory filings seeking approval for Zephyr valve in Japan and we initiated enrollment in our AeriSeal CONVERT trial, a multicenter, multinational study in Europe. Turning now to our performance in the fourth quarter. We delivered another quarter of record sales in the U.S., growing our business to $7.3 million.

In the fourth quarter, we saw strength in the southern parts of the United States which were previously impacted by the Delta variant, offset by a new increase in COVID cases in the Midwest. Outside the United States, we recorded $6.4 million of sales despite being impacted by a mid- to late quarter Delta variant surge across major regions of Europe.

As we entered 2022, the impact from the recent Omicron surge was widespread and simultaneous affecting all of our major U.S. and European markets. We expect the first quarter of 2022 to be significantly impacted by COVID with a recovery in our business starting in Q2 and with revenues continuing to accelerate in the back half of the year.

Taking this into account, we expect first quarter 2022 revenues to be similar to the first quarter of 2021 in the range of $9 million to $10 million and full year 2022 revenues to be in the range of $55 million to $60 million.

Despite the Omicron impact in the first quarter, we have conviction in the fundamentals of our business and the strength of our team. All signs continue to point to strong underlying demand for our Zephyr valve treatment.

Physicians and hospitals remain eager to adopt our procedure as evidenced by 16 new hospitals which treated their first Zephyr valve patients in the fourth quarter.

Patient interest has never been stronger as indicated by a more than doubling of patient calls into treating centers through 2021 as compared to 2020 and a doubling of the number of social media followers.

And throughout the pandemic, we have proven that we've been able to adapt and grow our business, demonstrating strong commercial momentum during periods less affected by COVID.

To best position ourselves for the recovery and procedure volumes, we will continue to focus on commercial initiatives in 2022 to expand our global footprint and drive awareness of our Zephyr valve therapy. While we now have full geographic coverage in the U.S.

with our 54 sales territories, we will selectively and opportunistically add additional sales territories throughout the year and expect to end the year with around 60 territories in the U.S. We expect to continue our current pace of opening new centers and are targeting to have approximately 280 U.S. treating centers opened by the end of the year.

On the international front, we will continue the expansion of our sales force and expect to add approximately three to five additional sales territories throughout the year, primarily within Europe. In addition, we will be making preparations for our geographic expansion into Japan.

As I mentioned earlier, we formally submitted our regulatory application for Zephyr valve to the Japanese authorities in December of 2021. Under the filing time line, we anticipate regulatory approval by the end of this year.

Following the establishment of reimbursement, we expect to launch commercial efforts in the back half of 2023, entering what we estimate to be a $1 billion market with approximately 100,000 patients in need of our Zephyr valve treatment.

To prepare for commercialization, we expect to bring on a commercial leader and to start assembling a direct presence in Japan in the latter part of this year. Finally, we are excited about the progress our AeriSeal clinical development program has made.

Last year, we initiated a multicenter international clinical trial studying the use of AeriSeal to convert patients with collateral ventilation into Zephyr valve eligible patients and expect to continue enrollment of this study through 2022.

We also continue to progress with preclinical studies required for an IDA [ph] application with FDA to conduct a U.S. pivotal trial. In summary, we are well positioned to accelerate growth in our business and to provide our life-changing Zephyr valve therapy to patients as we move out of the COVID pandemic.

The underlying demand for our treatment and the capabilities of our team have never been stronger and I am confident in our ability to execute on our initiatives and goals as we've done in the past. I'll now turn the call over to Derrick to provide a more detailed review of our fourth quarter results..

Thank you, Glen and good afternoon, everyone. Total worldwide revenue for the three months ended December 31, 2021, was $13.7 million, a 39% increase from $9.8 million in the same period of the prior year and an increase of 40% on a constant currency basis. U.S.

revenue in the fourth quarter was $7.3 million, a 49% increase from $4.9 million during the prior year period. The record U.S. sales reflect strong procedure growth and commercial momentum of our business in regions less affected by COVID.

International revenue in the fourth quarter of 2021 was $6.4 million, a 30% increase from $5 million during the same period last year and an increase of 31% on a constant currency basis.

International procedure volumes were impacted by the COVID wave that swept through parts of Europe in the back half of the quarter and led to the regional hospital procedure restrictions. Gross margin for the fourth quarter of 2021 was 74.8% compared to 72.0% in the prior year period.

The year-over-year expansion in gross margin was driven by improved production efficiencies. Looking ahead, we expect gross margin to remain between 74% and 75% in 2022 as production efficiencies are partially offset by investments to add scale and redundancy to our supply chain as well as increases in material costs.

Over the longer term, we continue to expect margins to gradually move up into the high 70% range. Total operating expenses for the fourth quarter of 2021 were $22.6 million, a 38% increase from $16.4 million in the fourth quarter of 2020.

Stock-based compensation expense was $2.8 million in the fourth quarter of 2021 and $9.9 million for the full year 2021.

Looking ahead, we expect operating expenses for the full year 2022 to fall between 100 and $105 million, inclusive of approximately $16 million of noncash stock-based compensation expense as we continue to build out our commercial operations, invest in our research and development programs and further scale our business.

R&D expenses for the fourth quarter of 2021 were $3.7 million compared to $2.5 million in the same period of the prior year. The increase was primarily due to an increase in personnel, clinical study, regulatory and development-related expenses needed to support our product development and clinical research activities.

Sales, general and administrative expenses for the fourth quarter of 2021 were $18.9 million compared to $14.0 million in the fourth quarter of 2020.

The increase was attributable to an increase in sales and marketing expenses as we expanded our commercial team and increased commercial activities and an increase in public company expenses related to the scaling of our general and administrative infrastructure.

Net loss for the fourth quarter of 2021 was $13 million or a loss of $0.35 per share as compared to a net loss of $9.3 million or a loss of $0.27 per share for the same period of the prior year. And average weighted share count of 36.6 million shares was used to determine loss per share for the fourth quarter of 2021.

We ended December 31, 2021 with $191 million in cash, cash equivalents and marketable securities, a decrease of $11.7 million from September 30, 2021. Finally, turning to our revenue outlook for 2022.

We expect full year 2022 revenue to fall in the range of $55 million to $60 million which represents 14% to 24% revenue growth over 2021 and approximately 17% to 27% growth on a constant currency basis as we estimate foreign exchange to present about a 3% headwind to global sales growth.

As previously mentioned, we have been seeing a significant widespread impact from the Omicron surge since the start of this year which has resulted in the delay in disruption of Zephyr valve procedures.

Given this unique circumstance, we are providing quarterly guidance on a one-time basis for the first quarter of 2022 to be in the range of $9 million to $10 million.

Based on current trends, we expect to see a recovery in our business in the second quarter and a sequential improvement in sales throughout the remainder of the year as procedure volumes normalize. With that, I'd like to thank you all for your attention and we will now open the call up for questions.

Operator?.

[Operator Instructions] The first question comes from the line of Joanne Wuensch from Citi. Your line is now open. You may ask your question..

Hi, this is actually Anthony [ph] on for Joanne. Thanks for taking our question. I guess just starting with guidance at the midpoint, it's pretty fairly below consensus.

Can you just talk about more some of the assumptions that went into that guidance? And then what you're seeing now that were towards the end of February?.

Sure. I'll go ahead and start and maybe Derrick can join in on the discussion of guidance. So basically, what happened, or what's happening in 2022 is a reflection of a weak first quarter start which basically across all of our major geographies, we got impacted by Omicron. And unlike prior waves, it all hit at once.

And the good news, I guess, is that it's going away quickly. The bad news is it came on quickly and it hit us in all different locations.

As it relates to how we look ahead, what we've seen is significant weakness in the first half of the -- or the first month, certainly, of the quarter and pretty significant strengthening as we've moved through the middle and as we project out to the back half of the quarter. So we feel very good about the fundamentals of the business.

We've seen this show before, so to speak, as it relates to pulling out of these COVID waves. We have never before seen a COVID wave that hit all of our markets so intensively all at the same time. But it is receding very quickly..

Yes. Thanks, Anthony.

So, you know, I would add in -- so starting with Q1 guidance, as Glen mentioned, despite the fact that this is probably kind of the hardest and most severe impact that we've seen from COVID across all of the waves that we've seen throughout the last couple of years, our Q1 guidance kind of implies sort of a similar revenue level as to what we did last quarter, or last year or one year ago.

That winter wave that I guess last year did not hit us as simultaneously and as widespread as Omicron did. So that's kind of what we're looking at for our Q1 guidance. And as Glen said, the good news is that we do feel like we're coming off the back of this. We're hearing hospitals talk about opening procedures in the March time frame.

So that timing of the reopening of two procedures, whether it's early or late March, that's going to affect and impact Q1 a bit but it's a matter of when and not if.

And for the remainder of the year, we're feeling really, really good about our ability to quickly recover and regain momentum, right? So we've been consistently seeing strength and momentum in our business during periods of minimal COVID impact throughout the year. We're building our base of accounts and increasing customer and patient demand.

And if you overlay on top of all this an expectation that the worst of the pandemic seems to be behind us, I think we're very well set up for reacceleration through the remainder of the year.

That said, if there is one thing that we learned from last year, it's to prepare for the unexpected and there does remain some uncertainty around things like the time course of resolution for hospital staffing shortages and potential for additional possible variants that might come later on in the year.

So we've tried our best to factor all that into the guidance that we've provided. And so from where we sit today, we feel really, really good about our ability to achieve the guidance that we set out..

Got it. Appreciate the color..

Thank you. We have the next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is now open. You may ask your question..

Hi, this is Charles [ph] on for Larry. Just maybe digging in a bit more on the Q1 guidance; so I'm just looking at the kind of year-over-year. I mean, 2021 also, I mean has a step down in Q1 with the extra wave impact there. Although like this one, it's looking, your guidance is implying some 30% sequential step down over Q4.

So I think you've kind of explained that it's all hitting geographies at once and so that makes sense.

But is that implying that you might think that there's like a quicker rebound when it is done, if it's not a long process impacting all geographies at different times, might that come back a little bit faster than what you saw last year at the same time? And then I have another quick follow-up to that..

Well, with regard to rebound, we obviously look at a number of different measures. And right now, I think one of the things that we've reported on in the past has been the active accounts. And active accounts, for example, in January were basically 31%. So 70% of our U.S.

accounts were down in January which you basically have to go back to the beginning of the pandemic to be down at that sort of level. Late last year, or I should say, at the beginning of last year, late 2020, we got hit pretty hard as well. But that's the starting point.

And we're seeing that build out in February, more and more accounts are coming back and we're seeing our average daily sales sort of strengthen across the period. So we are anticipating continued acceleration exiting the first quarter and then moving through the second quarter and beyond..

I would add to that, Charles, that the other biggest difference that we have between this year and where we were a year ago is that we have about 45% more total treating centers in the U.S. than we did last year. So we have a much, much greater base of accounts.

And so, when we see the recovery in procedures and the recovery and activity of our accounts, just by definition, that base of accounts that we have is much greater and that's obviously going to be a significant tailwind for us this year versus last..

And my quick follow-up, you answered the percentage of centers doing procedures. You normally sometimes have a leading indicators with StratX scans seeing how many procedures might be coming and going forward.

When these facilities are shut down or restricted like that, do you still get that same leading indicator of StratX scans? Are they still scheduling procedures further out when they -- when it might be open again? I wonder if you have any color there to share that's useful..

Yes. No, it's a great question. So, it's actually something that we talk about quite a bit which is that when COVID hits heavy in a particular geography and of course, Omicron hit everywhere all at the same time. But typically, what happens is the folks that are managing the patients in the ICU tend to be pulmonary and critical care specialists.

And when they get pulled away to do that service, they're not analyzing patients as possible candidates for our procedure. And as a consequence, much of the pipeline slows down.

And so the pent-up demand, if you will, the sort of the first procedures that are done moving out of one of these waves are almost always largely composed of patients who are being rescheduled. So that's really what our pent-up demand is.

StratX was lumpy in the fourth quarter in the Southeast, for example which got hit hard in the third quarter, was actually strengthening in the fourth quarter. And we saw StratX up there, whereas the upper Midwest and across to, through Pennsylvania got hit hard in the fourth quarter and we saw StratX down in that geography as well.

So we do see StratX soften during heavy COVID times. So it's not as though we were accumulating a lot of StratX scans in heavy hit areas during the Omicron wave that's now receding..

All right, that's helpful. Thanks, Glen and Derrick..

Thank you. Next question we have the line of Jason Bednar of Piper Sandler. Your line is now open. You may ask your question..

Hey, good afternoon, everyone. So I'll just ask another one here on the guide. I totally understand the challenges here that are weighing early in the year. But maybe hoping you can unpack a bit more why we shouldn't be thinking of account productivity improving even a little bit more than what seems to be reflected in the guide.

I guess is the guide just have you done some conservatism right now without yet seeing that volume come back in the door January, February? Or is there something else that you're balancing with additional waves or hospital staffing issues as we think about the strength of that recovery coming back maybe beginning in that March-April time frame?.

We're obviously, Jason, wanting to be very thoughtful about what we commit to here. And we did definitely see some strengthening in the productivity of accounts last year in times when there was -- in certain regions of the country that weren't being directly impacted. So that was really encouraging.

I know that we've been tracking this and reporting on it across last year and the year before and it has been significantly impacted by COVID on average. But when you break it down by region and look at the areas that are less impacted by COVID, we did see strengthening.

So to the extent that we see as we expect some reduction in the impact of COVID across the coming year, we would expect to be moving that productivity number up..

And maybe I'll follow up just a bit, just by my model, playing with things here, it looks like productivity maybe doesn't improve until we get to like exiting this year and fourth quarter, maybe we can handle some of those offline.

But just some quick back of the envelope, it looks like you're targeting maybe something in the range of 30% growth in U.S. Zephyr procedures for the second half of '22. And I'm not asking you to necessarily bless that, I know there's assumptions in there on what I'm assuming there for second quarter and how your international markets play out.

But you've got some easy comps there from Delta and Omicron in third quarter and fourth quarter.

I guess maybe the follow-up here is just why wouldn't procedure volumes be better than that 30% growth with the bigger customer footprint you have out there now?.

We will focus on getting the engine going obviously in the back half of this quarter and accelerate, I think, pretty significantly on a quarter-over-quarter basis in the second quarter and then from the second quarter on to the third quarter.

So I think we're looking at this in number of different ways, including the way that you're describing from a productivity perspective but also when you begin to talk about increasing quarter-over-quarter by the magnitude that we're talking about across the year. It's -- we want to be thoughtful about what we're going to commit to..

Maybe if I could squeeze one more.

Is there any limitation you have like operationally or with your commercial infrastructure that would prevent like maybe a faster acceleration or whether that's anything at the end customer level or, again, with your own sales force or production?.

No is the short answer. The business is fundamentally sound by our assessment. I mean, we're looking at metrics that are suggesting are providing us with great confidence as we talked about the calls that are going into hospitals are up 100% year-over-year, the social media is up over 100% and these are big numbers.

We're in the six figures now in terms of followers. We initiated in the latter part of 2020, a patient opt-in option where we can engage with patients and really cultivate and nurture their journey towards treatment. And we've seen just a spectacular growth going from five figures to nearly six figures in that regard.

So we've got a lot of things that really seem to be lining up in addition to having, as Derrick said, 45% more accounts than we did the year before. We've got more reps, referring docs are clearly focused on what we're doing and we're focused on them. And so, I don't think there's anything in our supply, our ability to supply is there.

So we're just trying to get the engine sort of restarted. We hadn't experienced this before. The only other time where we were down at this level really was at the start of the pandemic and that was really about the reservation of capacity.

What I'm saying is, like, for example, in California, you'd have 600 bed hospitals that were largely closing their doors to just about everything. And then none of the patients showed up here in California. So there's a tremendous amount of reservation, whereas with this Omicron and the sort of infection rate in the U.S.

estimated at about 10x, even though the follow-through to the ICU was way less on a proportional basis, it still drove a ton of patients into the ICU across the U.S. and across all of our major OUS markets. So the good news is it came on -- or I guess the bad news is it came on superfast. But the good news is we're way down the curve.

And we are seeing and we're hearing the engines start. And we're seeing this week, last week, revenues strengthened significantly and looking at our scheduled procedures going forward, we're quite encouraged by what we see and also what we hear from our customers. So no constraints here; the fundamentals are solid..

Yes and if I could just jump in, going back to your question on growth rates, Jason. Our guidance -- while you're correct in that, on average, in the back three quarters of the year may imply approximately 30% growth in the U.S.

Our guidance implies well over 30% growth exiting the U.S., right? And so, that average really incorporates the sort of restart coming off this Omicron wave that we're hitting. And frankly, some of the uncertainty is around how quickly the accounts can bounce back and how quickly we restart.

But we expect to be exiting the year at a year-over-year growth rate in the U.S. and globally, of well over 30%..

Thanks, guys..

Thank you. We have the next question comes from the line of Rick Wise from Stifel. Your line is now open. You may ask your question..

Hi, good afternoon, Glen. Hi, Derrick. I was hoping if you could break down this sort of recovery discussion in a little more granular way. I feel like we've been sort of talking about the numbers holistically, a little more leaning toward the U.S. Maybe Glen talk a little bit more about what's happening internationally.

I mean, the truth is when I look at my numbers, the U.S. held up better than I might have thought, sort of sequentially flattish, 4Q versus 3Q. The OUS was a lot weaker than I expected in modeling. I will just squeeze this last little bit.

So was OUS worse than you expected? Is the recovery happening equally in each geography? How are you thinking about the unfolding of the year in that way?.

Boy, there's a lot in that question. So let me just try. So starting at the beginning of that. Yes, we were pleased with the way that we last reported in early November and we were looking ahead. And a lot of things were going on at that time.

If you look at any of the curves, they all seem to bend pretty dramatically upward within a day or so of that time point. But we were pleased with how things ended up in the U.S., all things considered. We were getting impacted pretty significantly in the fourth quarter in the upper Midwest.

In fact, in a place like Michigan, the Delta variant actually impacted upper -- Omicron was a bit of a reliever for them, because they were getting hit so hard late in the year in the Upper Midwest.

And so -- but at the end of the day, we have a lot of accounts in the United States and so we were able to perform reasonably well in the fourth quarter and came in, in a fairly solid way.

I think where we didn't expect things to play out exactly the way they did was the acceleration of the Delta variant, most particularly in German-speaking parts of Europe. And in those German-speaking parts of Europe, sort of in Southern Germany, Bavaria and Saxony, we're particularly heavily hit.

And so I think that we got impacted in a subset of Europe, a big part of our business to a degree that we did not anticipate. So I think that really explained the shortfall to what our expectations were the last time we reported. So that's where we're coming out at this point.

And then in those geographies, if you look at Michigan, the shape of the curve in Michigan is very much like the shape of the curve in a place like Germany, where it looks like Delta just handed off to Omicron. So they went from a really bad situation to an even worse situation.

And then, Omicron hit in all other geographies and is essentially undermined to some extent, the one that is sort of the leaping off point that we had anticipated. And we are anticipating a much more solid first quarter which Omicron is going to get in the way of. And so that largely explains the shortfall that you see totaling across the year.

As Derrick had mentioned, though, I think that if you look at -- we're not providing specific guidance but I suppose if you're doing the math on the back of the envelope, the velocity at which we're exiting this year, 2022 is in the neighborhood of where I think we were thinking about or many of the models at the time of the IPO were having us in that kind of neighborhood exiting 2022.

So we're making up a lot of ground. I think we feel really good about the foundation that we've put in place and how we're going to leverage that across the year..

And maybe just last from me on gross margin. Here too, relative to my expectations, gross margins were better than we looked for in the fourth quarter despite these headwinds and challenges. Maybe just -- maybe I just didn't take it in. Maybe you could, Derrick talk about that again.

And I'd be curious, you've emphasized today and as you have in the past, the long-term potential for high 70s, it's like what's required, what kind of revenue base is required to get to that territory? Is it just revenues? Or is it something else?.

So we're feeling really good about our gross margin, right? This quarter, we delivered just under 75%. That's the highest that we've ever delivered in the history of the company. So clearly, we're seeing the benefits of our production efficiencies and overhead absorption that I talked about materializing as we expected.

We're always going to see some fluctuations in margin from quarter-to-quarter depending on in-period costs and product mix and things like that. But over time, we do expect our gross margins to continue to move higher as we've seen over the last couple of years.

That said, in the near-term, we are going to be making some investments in scaling our overall production infrastructure and adding some redundancy to our supply chain which I think is ever important in the current environment. And we're also cognizant of some of these supply chain pricing pressures.

We're seeing some very modest pricing pressure, all very manageable but we are seeing some hints of modest pricing pressure that's similar to what's being felt across the industry. So that's why we are guiding to stay kind of within this 74% to 75% range for the year right now.

Hopefully, we'll be able to do a little better than that but that's where we're comfortable kind of starting the year at. But we do expect, as I mentioned, that over time, well, as you mentioned, too, that we'll continue to creep that gross margin up. And I think we can get to kind of the high 70% range over the next few years.

And I think that still is primarily driven by continued production volume increases that drives production efficiencies.

And so, I think when we get into that revenue range, with a nine-digit number starting with one, somewhere in that range and that's when I would expect that we would get to that high 70% gross margin range; and we feel very good about getting there..

Appreciate that, Derrick. Thank you..

Thank you. There are no other questions at this time. I would now like to turn the call over back to Mr. Glen French..

Alright, well, thank you all very much for your time and attention today. We also thank you for your continued interest in Pulmonx. Good afternoon and good evening..

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect..