Thank you for standing by. Welcome to the Pulmonx First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Laine Morgan at the Gilmartin Group. Laine, please go ahead.

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 issued a press release announcing its financial results for the quarter ended March 31, 2023. 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 related 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 estimates 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 included in annual report on Form 10-K filed with the SEC on March 1, 2023. 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, May 2, 2023. 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’ll turn the call over to Glen.

Thanks, Laine. Good afternoon, everyone and welcome to our first quarter 2023 earnings call. Here with me is Derrick Sung, our Chief Financial Officer. I am delighted we are off to a strong start in 2023 with our focused commercial strategy on track to enable us to deliver on our near-term revenue commitments while we continue to make consistent progress on our longer-term geographic growth and clinical indication expansion initiatives. We achieved $14.5 million in worldwide sales, benefiting particularly from relative strength in the U.S. where we achieved 55% year-over-year sales growth. We expanded our base of treatment centers and saw relative stability and account activity despite typical first quarter seasonality. These trends, along with our commercial momentum exiting the first quarter, leave us confident that our 3-pronged strategy designed to build a strong foundation for long-term sustainable growth will enable us to achieve our previously communicated full year 2023 revenue guidance of $63 million to $65 million. As a reminder, our focused commercial strategy is as follows: first, training hospitals that we believe, based on our comprehensive assessment criteria, have the potential to be high-performing Zephyr Valve centers; second, providing information and education on Zephyr Valve program best practices to our physician and administrative champions, which facilitate increased efficiency and procedural capacity; and finally, increasing commercial activity by building local education and awareness of the substantial benefits of Zephyr Valves for emphysema patients and the COPD physicians who manage them. While we continue to make progress on all 3 initiatives, our primary focus this year remains on educating existing U.S. treating centers about best practices for Zephyr Valve programs to encourage greater efficiency, and therefore, procedural capacity and improve the patient experience. We are seeing an increasing number of our existing accounts investing in their Zephyr Valve programs as…

Thank you, Glen, and good afternoon, everyone. Total worldwide revenue for the 3 months ended March 31, 2023, was $14.5 million, a 35% increase from $10.8 million in the same period of the prior year and an increase of 37% on a constant currency basis. U.S. revenue in the first quarter was $9.3 million, a 55% increase from $6 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr Valve therapy and also benefited from depressed sales in the first quarter of 2022 due to the COVID pandemic. International revenue in the first quarter of 2023 was $5.2 million, a 9% increase from $4.8 million during the same period last year and an increase of 15% on a constant currency basis. The increase in international sales was driven by growth of Zephyr Valve procedure volumes in our European geographies. Gross margin for the first quarter of 2023 was 73% compared to 75% in the prior year period, reflecting slightly lower capacity utilization. We continue to expect gross margin for the full year 2023 to fall within the range of 73% to 74%, remaining near 73% in the first half of the year and trending towards 74% in the back half of the year. Total operating expenses for the first quarter of 2023 were $27 million, a 13% increase from $23.8 million in the first quarter of 2022. Non-cash stock-based compensation expense was $4.4 million in the first quarter of 2023. Excluding stock-based compensation expense, total operating expenses in the first quarter of 2023 increased 11% from the same period of the prior year. Looking ahead, we continue to expect operating expenses for the full year 2023 to fall between $112 million to $114 million, inclusive of approximately $22 million of…

[Operator Instructions] And our first caller is Larry Biegelsen with Wells Fargo. Larry, your line is open. Please go ahead.

Hey, good afternoon. This is Vic in for Larry. A couple of questions for me please. So first, you beat consensus by about $1 million, but you kept guidance intact. Can you potentially provide some insight as to why you decided not to raise guidance after the beat and how to think about quarterly cadence from here? And then I had a follow-up. Thank you.

Sure, Vic. So we are very happy with our performance in the first quarter. We are clearly operating in a much more stable and predictable environment now. And the momentum and the early traction that we saw in Q1 certainly gives us a lot of confidence around our ability to achieve the guidance of $63 million to $65 million that we set out just 10 weeks ago. And we do feel good about trending towards the higher end of that range, given what we’ve seen in that first quarter. That said, it is still early in the year. And we talked previously about how our efforts to drive same-store sales and account productivity will take some time to yield results that will be more visible in the back half of the year. So at this point, we just don’t want to get out over our skis on guidance, but we do feel really good about the direction that we are headed.

That’s helpful. And then my follow-up so Regeneron released top line data on Dupixent for COPD in Q1, we are looking at your thoughts on how you are thinking about the potential impact on Zephyr from Dupixent? And thank you for taking the questions.

Yes, I’ll try to handle that. There is a number of pharmaceuticals that are out there that are being used for the treatment of patients with COPD. And some of them are targeting smooth muscles. Some are targeting mucus production. None of them are targeting trapped gas in the lungs. So that’s what we’re targeting. There’s no drug out there that can solve a liter of trapped gas in the lung. There’s a surgical procedure that isn’t well adopted because of the morbidity and mortality associated with it. Last year, I think we did about 5x as many of our procedures as the surgical procedure was done. We’re able to treat a much wider array of patients as a result of the approach that we take. So Dupixent, we are happy for COPD patients. We don’t see that impacting our opportunity.

[Operator Instructions] Okay. Our next caller is Joanne Wuensch from Citibank. Joanne, your line is open. Please go ahead.

This is actually Leon for Joanne. Thank you for taking our questions. I guess the first can you just maybe talk about what you saw in the quarter in terms of the operating environment? What are you seeing on staffing? Is there still maybe any lingering COVID-19 disruption? And then how are things looking so far here in the second quarter?

Yes. I think the short answer is that we are – we did not see what I would call material staffing issues in the first quarter and we thus far in the second quarter, we are not seeing what I would call material staffing issues. I think that’s a bit of a reflection of just being a procedure-based technology, one that’s paid for under a surgical DRG. I mean, these are the kinds of procedures that I think something like 90% plus of hospital revenue comes from these types of patients, these surgical patients, procedure-based patients. And so we kind of fall into that category and as a consequence, I think – there maybe staffing issues in other parts of the hospital, but therapeutic procedures I think are the first ones to get covered as it relates to staff and so forth. Not to suggest that we haven’t faced it, I wouldn’t – but I just don’t – across the 300 accounts that we are in, I would say it’s immaterial.

Got it. Okay. And then the 15 accounts you have in the U.S., should we expect a similar cadence of account adds throughout the rest of the year?

Yes. So I think we are projecting 10 to 12 a quarter or something on that order. I think I said 40 to 50 this year. So we are in that neighborhood. So 15 is a nice number to start with, but that – the total is the one that I mentioned in the script.

Okay, thank you very much. [Operator Instructions] And our next question comes from Cecilia Furlong with Morgan Stanley. Cecilia, your line is open. Please go ahead.

Good afternoon and thank you for taking the questions. I wanted to ask if you could just speak a bit to what you are seeing in the U.S. versus some of the O U.S. markets specifically around recovery and stabilization. And then as we think about just the breakout of 2023 guidance, if anything has shifted as you think about contributions from U.S. versus O U.S.?

I am going to let Derrick take the second question about whether we see any difference in terms of the shift between U.S. and O U.S. guidance. As it relates to U.S. and O U.S. performance, obviously we highlighted that we had a really great quarter in the U.S. I would say that we had some other markets that also had strong sort of increases over prior year. Specifically, if you look at our top four markets, three out of the top four – or actually, four out of the top five all had good increases. Specifically, the UK, France and Switzerland I think had real strong performance versus prior period. And I think the magnitude of that particularly in the bigger markets, France and the UK, was on the order of what we saw in the United States. They are executing against a plan that’s remarkably similar, and the results are remarkably similar as well. So I think that’s where we saw things strengthening.

Yes. And Cecilia, regarding guidance, in Q1, the U.S. accounted for about 64% of our total sales in the quarter. I would expect that ratio to remain around the same for the remainder of the year. So I would expect for the remainder of the year, the U.S. is somewhere between 60% to 65% of total sales, and O U.S. is somewhere in the 35% to 40% range. Now over time, we continue to expect the U.S. to grow meaningfully faster than our international business. Even this year, our guidance implies the U.S. grows 20% to 30% in that range, and our international business grows more in the 15% to 20% range. So we do expect U.S. to continue over time to become a significantly greater portion of our mix of sales.

Great. And if I could follow-up as well. Just the 15 account adds in the quarter. I know you talked about previously some of your specific initiatives in terms of engaging, going deeper into new accounts, getting them trained. Can you just speak to the profile of some of these accounts driving interest and how it fits into your broader ramping strategy going forward? And thank you for taking the question.

Yes. So we’re in most of the major metro areas. I think a lot of the adds are incremental adds in those geographies. What we’re finding is that patients would prefer to drive less far to get the procedure done. The going deeper with these accounts is we’ve just increased the hurdle that they need to clear in order to come in for training and to become an account that we adopt, essentially. And that involves bringing profiles of patients in before they come to training such that when they exit training, they do their first cases as opposed to going back and trying to find – start the process of identifying patients. And so they hit the ground running. We also have a follow-up on those first three patients where an expert will sit down with the physicians, talk about lessons learned and ways that they could have made that a stronger exercise. And those are always – and invariably, those are super positive kinds of experiences. So anyway, that’s how we’re going deeper or getting deeper with our initial new accounts.

Great. Thank you.

[Operator Instructions] Our next question comes from Travis Steed with BofA Securities. Travis, your line is open. Please go ahead.

Hey, thanks for taking the questions. Maybe put some numbers on the progress with account productivity over the course of the year. I think you said 4.1 for Q1. And then I think the prior plan was to exit the year of 5 to 6. I just kind of want to go through some of the numbers and how you expect account productivity to ramp over the course of the year. And maybe some color on kind of the top 10% of your accounts, kind of the procedures that those accounts are doing and how those accounts look at this point.

Sure. Thanks, Travis. Thanks for that question. So just as a reminder to kind of ground everybody, when we look at our account productivity metrics, we are looking at the productivity of the cases on average per account for accounts that were active or put in a revenue generating order in a given quarter and had been up and running for approximately 12 months, because it does take a while. There is clearly a ramp-up on that productivity ramp. And so we look at what we call our established accounts or those that are active and up and running for at least 12 months. It was around 4.1 cases on average per account in the first quarter. Over the last three quarters or so, it’s kind of bounced around between four and five cases, so on average about 4.5 cases per quarter. And with some of the focused efforts that Glen recently just talked about, we do expect and are focusing on driving same-store sales that we believe will result in an increase in productivity. So exiting the year, we do expect to be above five, between that five and six range. And that’s in the U.S. specifically, and that is what is implied in our U.S. guidance. Relating to your second question around kind of our top 10% of accounts or so, we do continue to see strong performance in our top 10% of our accounts. I would say on average, our top 10% or 20% of accounts on average are doing, say, nearly 10 cases per quarter on average. So there is a wide range. And what we’re really focusing on this year is taking those accounts that have sort of lower productivity, again, focusing on same-store sales. And I think that’s the biggest driver that we see to our U.S. growth this year.

No, that’s helpful. And put some finer points on the Q2. I know last year, you expected Q2 to be flat sequential to Q1. I imagine Q2 could step up this year to Q1 in terms of total revenue?

We do. Exactly, exactly. In fact, specifically, I would say – I would expect a sequential growth of about 10% between Q2 and what we reported in Q1. And again, some of that reflects the typical seasonal softness that we expected in the January time frame starting the year that we did see in the first quarter. So I’d say it’ll be a meaningful step up of around 10% or so sequentially is what we would expect in Q2 versus Q1.

Great. That’s helpful. I’ll drop there. Thanks a lot.

Thank you very much. [Operator Instructions] Next, we have Rick Wise joining us from Stifel. Rick, your line is open. Please go ahead.

Good afternoon, everybody. Glen, maybe just if you could dig a little deeper on the – give us a little more color on the – your best practices for procedural efficiency programs. Clearly, it’s having a positive impact. I’m curious how many accounts have you brought this – where are you in the process of bringing these best practices maybe to accounts performing less optimally, if that’s the right way to phrase it? And I’m also sort of fascinated with the number of clinical coordinators you’re training in person. That sounds important. Any color on those things?

Sure. So we’re focusing on best practices across the clinicians who are doing the procedure, ensuring the patient selection is optimized and the execution of the procedure is optimized. We’re focused on sort of the administrative side of things, and that’s where the clinical coordinators come in. These programs, the larger programs are allowed to be large because of the great work that’s being done by these clinical coordinators, and they really keep everything running on time and so forth. But there are mechanisms by which – there is been a lot of manufacturing analogies where you can increase your cycle or decrease cycle time and increase throughput and so forth. So we’re making sure that we’re sharing those best practices from an administrative perspective. And then on the hospital level, when you think about the ultimate movement of these accounts across the six stages that we’ve identified and talked about in prior calls, that once you get up into sort of Stage 5, those accounts are looking inside themselves to try to identify the patients that exist within their own network. And Stage 6 is really that outbound look at things. I think what – so we actually – there are gatherings where best practices are talked about across the hospital in terms of the learning and so forth, and that sixth step is really an external focus. And so marketing gets involved. Not our marketing, but the hospital marketing team. And they learn from what other hospitals are doing to get better and stronger and look to expand their position in the given area.

And I don’t know Derrick, it’s for you or Glen. Maybe give us a little more color about your expectations for the O U.S. business for the rest of the year. Obviously, a dramatic recovery rebound, reacceleration in the U.S. O U.S. respectable 9%, 15% ex-FX. Is this the kind of pace that we should expect, or what are the drivers for the rest of the year? Thanks so much.

Yes, I expect – Derrick, you can add onto this, but I expect that things will strengthen outside the United States. I think we had a little softer than first quarter. I think it’s the kind of the getting things back up and running was a little slower to happen outside the United States. Having said that, as I said earlier in this call, we had great success stories. We’re in 25 different countries, so I can give you a little story about all the different countries. But the big ones represent 90% of our business, the top five accounts. So I expect Germany is going to strengthen relative to the first quarter. I think as we look ahead and across the year, both – that’s our second largest market behind the United States. I expect France and the UK, which are our third and fourth largest markets, to continue their very strong performance to this point. I expect the Netherlands to strengthen, Switzerland to continue to perform great. Spain to continue to perform really well. So I think we expect, certainly from a revenue perspective, for those countries to perform very well relative to the first quarter. I think the second quarter was a pretty solid quarter for us outside the United States last year. So I’m not – I don’t think – the percentage growth may not fully reflect the sort of strengthening of that business. If you look at it on a sequential basis, it’ll look I think very strong.

Yes. I think on average, Rick, that 15% growth that we saw this year or somewhere in that 15% – between 15% and 20% growth is what we’d expect out of our international business moving forward.

Thanks so much, Derrick. Thank you both.

Thank you very much. [Operator Instructions] Jason Bednar calling from Piper Sandler. Jason, your line is open please go ahead.

Hey, guys. Good afternoon. Thanks for the questions. Really a couple of follow-ups on some prior questions that were asked. Maybe to first follow-up on the international conversation here. Totally understand the UK and France performance is pretty strong from what you’re alluding to there and just being similar to the U.S. in terms of growth. I think the implication there, maybe not some of those markets you were just mentioning, Glen, but maybe some of those smaller international markets may be a bit more challenged or below the growth we saw that you put up in the first quarter here. I think they have been under pressure for a few quarters now. So I guess the question I have here just after that preamble is, do you have visibility on those markets bottoming out and/or starting to show a recovery in growth?

So the – I don’t really – there is not really – there is a couple markets outside the United States that I think we’re looking for a return to growth in. But other than that, I think most of our markets, even China is starting to reemerge. I think it’s important to note that that’s 1% of our global business, but they are starting to get active. But we’ve got a couple situations where top 10 accounts are not yet growing this year. So we’ve got 8 out of 10 that are growing, and I think I mentioned which markets those are. They are primarily in Europe where the bulk of our O U.S. business is. So is there a specific aspect to your question you’d like me to try to address?

No, I guess I was just trying to – I think you addressed it there. I was trying to reconcile how good some of your big markets were and knowing that some of those smaller markets have been under pressure for a while and then also reconciling the fact that you’re looking for growth to remain similar in the range of where we were in the first quarter. So again, just trying to put all the pieces together here, but I think you answered it. Maybe just to –

Yes, the little markets in the – yes, the little markets, Jason, just – they don’t amount to much. We got 20 markets that represent something like 5% of our business. So any one of them, whether it’s coming up or down, isn’t going to move the needle. But those big European markets do move the needle. Although we’re continuing to grow faster in the U.S. than we are on the international front, so maybe less so each year. But anyway, we’re very happy with how those things are proceeding.

Okay. We get involved in some of the moving parts around some of those markets. Maybe I’ve got the – some of my math and whatnot not totally squared away. But maybe a follow-up related to the retraining topic I think that Rick was sitting on a little bit, but maybe a different angle. Glen, you mentioned some activity about retraining some of those accounts that went through the virtual training process during the pandemic. I’m just curious if you’re willing to share a delta on the account productivity between those that have gone through in-person training versus those that were trained virtually during the pandemic. What does that look like today? It sounds like it’s a decent gap. I’m just wondering how much of an opportunity this could present for Pulmonx.

I think we’re just pulling people back into – we feel like there is – it’s a better experience and a better degree of engagement. A lot of back and forth during these face-to-face training programs, both with the physicians that are attending, so often they’ll be from multiple institutions, and the folks that are leading those sessions. So yes, I’m not in a position to share statistics on what kind of return we get on bringing somebody back. But suffice it to say that it’s – we determine that we believe it’s worthwhile to get people onto sort of a consistent footing as it relates to the foundation of experience and training that they have. And we felt in retrospect, though, virtual training was the best we could do when people were grounded and folks weren’t being allowed into other people’s hospitals and so forth, that virtual training was the best we could do. It was better than nothing, but not nearly as good as face-to-face training. So we’re putting everybody – trying to get everybody back onto sort of this equal footing.

Okay. Alright, thanks so much.

Thank you very much. [Operator Instructions] This will be our last question this evening, and it comes from Bill Plovanic from Canaccord Genuity. Bill, your line is open. Please go ahead.

[Indiscernible] on for Bill Plovanic. Thank you for taking the question. Regarding operating leverage, how should we think about investment in the commercial organization going forward? Thank you very much.

Thanks for that question. So we do expect to show continued operating leverage. We were very happy this quarter to demonstrate a year-over-year EBITDA loss, which was favorable to what we did last year. And we expect for the full year, our total EBITDA loss to be – adjusted EBITDA loss to be favorable to what we lost in 2022. And that, as you would expect, is primarily driven by continued and increased growth of our top line. We do expect to invest in our commercial activities and our commercial organization moving forward. Through this year, I think the investment will be relatively modest. But certainly, as we continue to expand and grow in out years, I certainly would expect investment in our commercial activities to increase, but not nearly as much as – or at the same rate as our revenue. So even this year, we’re looking at roughly 20% ish top line growth and a total of 11% ish, 10% to 11% increase in our operating expenses once you exclude stock-based comps. So I think we continue to demonstrate – we will continue to demonstrate that leverage, and that’s what’s going to get us to cash flow breakeven over the next few years.

Got it. And just as a follow-up with that. Sort of when you think about the – and this has been a little bit touched on. With the go deep strategy, was there anything you learned from that on top of the account-based growth that’s impacting how you’re going to think about operating leverage? Like is there any connection between those two things? Thank you.

I didn’t hear the first. What strategy?

When you’re just talking about just going deeper.

Going deep strategy, yes. Going deeper in existing accounts as it relates to operating leverage, we should realize operating leverage. We’re not adding incremental resources to drive that where – and these hospitals are sharing information with each other. So it’s – we’re supporting the efforts and desires of these accounts to learn from each other. So I think it’s favorable to leverage.

Thank you very much.

Thank you.

That does conclude our Q&A. I would like to now turn it back to Glen French, President and CEO, for closing remarks.

Thank you very much. So again, we are very pleased with the strong start to an important year for us. We remain confident in our strategy and its execution, and we very much like the momentum that we’re seeing building in our business. I’d like to thank you all for your interest and your time today. Have a good evening.

Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.