Ladies and gentlemen, thank you for standing by. Welcome to the Pulmonx Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to 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 ended June 30, 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, 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 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 annual report on Form 10-Q filed with the SEC on May 3, 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 GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, July 31, 2024. 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.

Thank you, Elizabeth, and good afternoon, everyone. Welcome to our second quarter 2024 earnings call. Here with me today is Mehul Joshi, our Chief Financial Officer. Overall, I am pleased with our second quarter performance as we achieved a record quarter of $20.8 million worldwide sales, representing 21% growth over the same period of the prior year. We are encouraged by our team's continued execution of our commercial and clinical pipeline strategies as we seek to further expand patient access to Zephyr Valve and serve the 1.2 million patients with limited treatment options who stand to benefit from BLVR. The momentum we built exiting the quarter leaves us increasingly confident in our ability to deliver on the previously communicated revenue guidance of $81 million to $84 million for the full year 2024. As expected, our second quarter results were driven by the continued traction of our commercial strategy in the United States, where we achieved sales growth of 26% compared to the second quarter of 2023. As a reminder, our US commercial strategy is 3-pronged. The first is that training physicians of hospitals that have the potential to be high-performing Zephyr Valve centers. The second is automating patient workflows and facilitating the sharing of best practices among existing centers to optimize their Zephyr Valve programs; and third, building local awareness of the benefits of our treatment among COPD physicians and patients. Throughout the quarter, we made substantial progress in each prong of our commercial strategy. In Q2, we added 17 new accounts in the United States and ended the quarter with 267 active accounts or centers that placed a revenue-generating order in the quarter. As we continue to expand our US account base, we're engaging with the C-suite of hospital systems, which provides the opportunity to present the benefits of…

Thank you, Steve, and good afternoon, everyone. Total worldwide revenue for the 3 months ended June 30, 2024 was $20.8 million, a 21% increase over the prior year period and also an increase of 21% on a constant currency basis. Our strong performance was driven by continued commercial momentum and adoption of Zephyr valve therapy. US revenue in the second quarter was $13.9 million, a 26% increase over the prior year period. International revenue in the second quarter of 2024 was $6.9 million, an increase of 12% over the prior year period and also an increase of 12% on a constant currency basis. Gross margin for the second quarter of 2024 was 74%, essentially flat versus the prior year period, reflecting lower utilization, partially offset by favorable geographic mix. Total operating expenses for the second quarter of 2024 were $30.9 million, an increase of 6% over the prior year period. Operating expenses included a onetime noncash charge in R&D of $1.7 million to impair internally developed software following a strategic decision to adopt a more efficient solution. This was a result of one of our gross margin improvement initiatives that will be gross margin accretive in the long term. Excluding the one-time charge, total operating expenses were flat over the prior year period. Non-cash stock-based compensation was $5.5 million in the second quarter of 2024. Excluding stock-based compensation expense and the one-time impairment charge, total operating expenses in the second quarter of 2024 were flat over the prior year period. R&D expenses for the second quarter of 2024 were $5.6 million, a decrease of 2% over the prior year period. R&D expenses, excluding the one-time software impairment charge were $3.9 million, down 32% versus the prior year period. The decrease was driven by lower clinical trial expenses and lower development…

Thank you. [Operator Instructions] Our first question is from Jason Bednar with Piper Sandler. Please proceed with your question. Q – Jason Bednar : Good afternoon, guys. Thanks for the questions here. Nice quarter. I wanted to start with the assumptions underlying the reaffirmed guide, and just really ask on how you're thinking about the cadence of procedure volume and revenue performance here in the second half. Anything outside the typical seasonality you would anticipate for the business as you look at the typical sequential performance 2Q to 3Q, same question, 3Q to 4Q or maybe just ask more directly, are you comfortable with where the street is currently sitting for the back half of the year on revenue.

Yes. So I appreciate the question, Jason, and thanks for the kind words there. As we're looking at the back half guidance right now, obviously, we take a look at how we performed in the first half of the year, and we're happy with where we've landed in the first half of the year. I think we've shown good growth. And as we move into the back half, we haven't been through the seasonality cycle yet, Mehul and I haven't. And as we look at 2022, we saw seasonality in both the US and OUS. In 2023, it looks like we're able to muscle through that seasonality in the US, which gave us kind of a tough comp for Q3. So with the variability between 2022 and 2023 and using that as kind of predictors for the future, we just -- we don't want to get over our skis there. And so we feel comfortable with our performance so far, and that's why we're able to reaffirm the guide. Mehul, anything you want to add to that?

No, I think you got it, Steve. Q – Jason Bednar : Okay. I appreciate it. That's helpful. Maybe along that same vein as we break out US versus international performance. I guess any differences in expectations on the mix that you're seeing? Is it playing out as you would have expected? And then maybe the follow-up to that is what's it going to take to get that international business back to maybe where the US is growing in that mid-20% plus range? Or should we just anticipate double digits is good enough for international? Just how you're thinking about that as we look over the next several quarters?

Sure. As we look at the OUS performance, it is really playing out how we expected it to play out. As you rightfully pointed out, obviously, they're not growing as quickly as they are in the US or as we are in the US. What we've gone and done is we've implemented the sales process tools in our European businesses. And I was actually over there for the European sales meeting. And I was really impressed. I think the team is really focused on executing that sales process. I left the meeting bullish about their plan. And really, as we look forward, they're building out patient screening, they're looking at developing practice efficiencies, physician education. We're seeing a lot of physician education coming from Europe as well. And so they've also built the sales plans around those tactics. And I was -- like I said, I was very impressed with the plans that they put together. And I think we'll start to see this play out a little bit more in 2025. So I would say that, the management and the team that are there are doing the right things to get that growth rate up over time.

All right. Excellent. Just if I could squeeze in one more, just as a little bit of a check the box to your question. But seeing if there's anything we need to consider modeling wise on the new China distribution agreement you have in place on the new distributor you're bringing on. Any inventory load-in or any -- any accounting we need to think about as you go through that transition?

Yes. Great question, Jason. Well, I think no, nothing on the loading or accounting at all. It's a new distributor that we've brought into the mix here in our OUS strategy. I think what we believe is that going down the distributor route will enable revenue to grow significantly faster than if we were going out there and building a commercial infrastructure in China. And so as you would expect in a distributor arrangement, your gross margins are a little bit lower. But over the long term, we expect gross profit dollars and operating margins to be accretive relative to building a business there ourselves.

And I think -- this is Steve real quick, Jason, if I can add on to that. As I think about that China market, you've got a huge population. You've got a huge smoking population as well. So it would naturally seem to be a place where we would be able to go and we would want to launch our product. I think one of the issues you run into is it's a self-pay population out there, and there's a large, large portion of that country is self-pay. And because of that, it becomes cost prohibitive for procedures like ours. So what we've done is aligned with a distribution partner, and they'll be able to identify the proper areas, and they actually have the bandwidth to go in and tactically take on that market. So from our perspective, we see it as a small revenue grower over the next couple of years. But hopefully, in the future, a couple of years out, we'll see that start to grow faster.

Got it. Helpful color. Thank you.

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question. Larry Biegelsen your line is open, please check your mute button. Our next question comes from the line of Joanne Wuensch with Citi. Please proceed with your question.

Hey, good afternoon. This is Anthony on for Joanne. Congrats on the solid quarter. My first question, the 170 new US centers, that was a pretty robust step-up from last quarter. What should we be expecting for the rest of the year? And was there any particular reason why it was so strong this quarter outside of normal course of business?

Anthony, this is Steve. As we've been guiding, it's about 10 to 15 new accounts per quarter is what we expect to bring on. We were a little bit light in Q1. We were at 9, and here, we're at 17. So I think combined, we're actually a little bit above where we would expect to be right now. But it's -- there's nothing out of the ordinary there. We've had a couple of opportunities and opportunistically gone in and brought on new accounts in different areas. I will say that our focus remains on growing in the same-store sales as well. I think it's nice for us to bring on these new accounts, especially in areas where patients have to drive hours in order to get a treatment, but really, what we want to do is these centers that are set up. They've got physicians that are on board. They've got their COPD referring physicians are already referring to them. They've built in workflow. They have coordinators and there's patient awareness and marketing activities going on in these areas. That's really where we see growth over time. And so that's a big focus for us. But obviously, we will bring on new accounts opportunistically as we need to or as we see the opportunity to do so.

Okay. That makes sense. And then Mehul, just could you talk about the cadence of margins in the back half is 2023, sort of a good place to look at that. And then as we think about the slight step-up in OpEx, is that going -- it sounds like it's going to be more weighted towards R&D on a dollar basis. I just want to confirm that that's the correct way to think about it?

Yeah. Anthony. So we do -- we guided to 74% to 75%. We've kind of -- are on average or at slightly over 74% in the first half. We do expect a tick up in the second half on gross margin. It's going to be driven by increased production in our factory, which will enable us to manage utilization better. And the other factor is that impacts gross margin is really geographical mix, right? So as geographical mix varies, that impacts gross margin significantly. And so we've had a little bit of that, both on a year-over-year and a quarter-over-quarter basis. But we do expect a slight tick up in gross margins in the second half of the year. On expenses, specifically on R&D, as I mentioned in the prepared remarks, as enrollment starts to tick up in our in clinical trials, we would expect some R&D dollars to increase. So as you know, there's usually a slow ramp up front when you start a clinical trial, and it will ramp much faster as you get through the various different time frames. But we do expect to pick up in the second half for R&D.

Great. Thanks guys.

Thank you. Our next question comes from the line of John Young with Canaccord. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking my question and congrats on the quarter two. Maybe just convert one, can you maybe taint investors what you can to a successful trial data would be? And will you go cross Emark for AirSeal using the data? Or will you wait for convert?

So hi, John, so we already have -- the CONVERT 1 data will be presented at ERS. The six-month data will be presented then. The CONVERT 2 data, we actually already have CE mark for AeriSeal. So we're just -- the CONVERT 2 data will be used for the PMA. It's the IDE trial in the US. So once we've completed our enrollment, we would then plan to commercially launch into the EU, and we expect that to be in the 2026 time frame. And then we would expect 2027 to be when we would launch in the United States once we go through the PMA approval process.

Okay. Thank you for that. And then it sounds like you've been really identifying friction points around just the commercial process itself, especially we talk about the software upgrade, improve the StratX workflows. What other friction points have you identified and what internal R&D work is being done? Anything around StratX or anything else in the commercial procedure that you've identified given your time in the field now?

Not really. It's a good question. We did launch a new StratX balloon that had some ease-of-use benefits for the physician, but those aren't really hold ups to the overall growth and long-term scale of the business. I think it really comes down to the workflow and what we can do to efficiently move patients through the process. And one of the things that I'm most excited about, Jon, as I've gone out in the field, I think our sales process is working. It's working in both the U.S. and it's working outside the United States. Our clinical trials are progressing well in both Japan as well as CONVERT 2. Our clinical publications are strong. We've got eight different abstracts coming out. We've got two more that we're waiting to hear on. But I mean, that's a significant new clinical data it speaks to the long-term efficacy of this product. If you look internally, I think the people are bought in our year-over-year employee turnover is slightly down year-to-date. So we're not seeing significant turn, which I think people were originally concerned about. We've got good, strong effective patient engagement, and that continues to grow for us. And now we've got work automation software. So we've got -- you've got a big untapped market. You have eager physicians that want to do more. You've got motivated patients that benefit from the procedure. We've got administrative buy-in. It's really that workflow is the key linchpin in my mind in order to really unleash a much larger volume in some of these larger centers.

Got it. Thank you again.

Thank you. [Operator Instructions] Our next question is from Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Great. Thanks for taking my questions. Maybe I'll start with the first question that was asked related to guidance. I wanted to revisit that point you made about seasonality from Q2 to Q3. Steve, I know you said it's been a little volatile in 2022 versus 2023. But kind of help us with the exact read-through we should be thinking about? I know one went up, one went down. So maybe starting there and trying to understand how we should think about Q3 of this year from a sequential standpoint if there were any onetime items in either of the previous two years that you were aware of that we can kind of glean some information from?

Yes, Frank, thanks for the question, and good to have you on the call. As we looked at 2022, we saw a decrease in both the US and OUS revenue. I think in both instances, we were pointed towards seasonality. And seasonality in this space is not only patients going on vacation, but perhaps you have doctors that go on vacation. If you have high-volume physicians that take a couple of weeks, a month off, obviously, that will affect the numbers. And so I think in 2022, that seasonality, I wasn't here, but we did see the seasonality in those revenue numbers. Moving to 2023, we were able to muscle through in 2023 in the United States. And we didn't see the falloff that we had seen in the prior year. I think there was a lot of momentum coming in from a couple of different projects that were going on, and they were able to push through in Q3 of 2023, and now in 2024, we don't know what US sales we're going to get. We do know that we will see seasonality in Europe as the physicians take a month off in many instances. And so those are just procedures that won't take place. As we look in the US, it's kind of a mixed bag. And as we've brought on a lot of new accounts that helps, so we dilute the impact of a small number of physicians going on vacation or not seeing patients. But overall, you also have patients that are saying, maybe I'll wait until I come back from my vacation or they're finding different reasons to push out their procedure. Mehul, anything you want to add to that or?

No. I mean, I think the only external data point I think about is level of travel has increased substantially this summer versus last summer. And as Steve mentioned, there are vacation schedules and things like that. So we're just uncertain of what the impact of seasonality will be in the quarter, specifically in the US. So I think we're just waiting to understand that a little bit better, before we kind of think about what to do with guidance.

Okay. That's helpful. And then maybe kind of a two-parter on the pilot programs. Obviously, you heard a lot about efficiencies and workflow processes, but can you maybe call out a couple of those bottlenecks that you're seeing? Is it a consistent bottleneck that the patient is getting stopped by, or is it a case-by-case basis? And then secondly, also on the pilot programs, can you talk about maybe some of the channels you may use to enhance local awareness?

Sure. So on the first, your question is, are the bottlenecks consistent across the board? Or is it different in different places? I would say it's different in different places. We find that when accounts will add a coordinator or a navigator that can actually manage that patient through the process, they do significantly more than accounts that do not have coordinators and navigators. The physicians will -- if you have a physician that's left on their own to manage the workflow associated with bringing a patient through the process, they do fewer than if they have a navigator that is managing that process. If you think about our tools that we've launched, I talked about Lung StratX Connect. L Lung StratX Connect makes it easier for the facility for that Navigator, coordinator or physician, whoever is managing that patient to upload the CT Scans without having to put Verna CD in radiology, go through, find a computer that actually takes CDs these days, plug it in, upload it to the cloud. Now they'll be able to pull these directly from the PAT system. So I think that's a good workflow improvement that will make it easier for patients to receive the treatment. I think more importantly, on Lung StratX Connect is the ability to track the patient through the process. So there's a workflow component that will actually track has that patient gone through different areas and different levels of testing that are necessary in order to get that patient treated. Right now, you've got coordinators. You have physicians that are on Excel spreadsheets that are on sheets of paper. It's just not very -- its not automated. And so we have the ability, we've put together the software that allows them to track that patient through the process.…

Okay. Thanks for taking my questions.

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

Thank you, Operator. To conclude, I'd like to take a moment to thank Pulmonx's employees worldwide for delivering a strong second quarter and their continued dedication to fighting every day, for every breath, so our patients don't have to. Thank you all for your time. I appreciate it.

This concludes today's conference call. Thank you for participating. You may now disconnect.