Thank you for standing by. Welcome to the Pulmonx Third Quarter 2023 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. 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 John McKune, Interim Chief Financial Officer and Vice President Corporate Controller. Earlier today, Pulmonx issued a press release announcing its financial results for the quarter ended September 30, 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 relating to our Chief Financial Officer transition, our operating trends, commercial strategies and future financial performance; the timing and results of clinical trials; expense management, expectations for hiring; growth in our organization; market opportunity; guidance for revenue; gross margin and operating expenses; commercial expansion and product pipeline for 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 included in quarterly report on Form 10-Q filed with the SEC on August 4, 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, October 30, 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, and welcome to our third quarter 2023 earnings call. Here with me is John McKune, our recently appointed Interim Chief Financial Officer, who's been a leader on our finance team as VP Corporate Controller since our IPO. We are very pleased with our recent performance, as we achieved another quarter of record revenue. In the third quarter, we delivered $17.7 million in worldwide sales, representing 31% growth over the same period of the prior year and 29% on a constant currency basis. Growth was driven primarily by record U.S. performance as we achieved $11.8 million in sales, representing 41% year-over-year growth. Outperformance in the U.S. was due to continued momentum and traction of our focused commercial strategy and also to slightly less seasonal impact than expected. Meanwhile, seasonal impacts internationally were more consistent with our expectations and historical trends. Given the strength of our business year-to-date, we are updating our full year 2023 revenue guidance to be in the range of $67 million to $68 million, up from our prior guidance of $64 million to $66 million. At the midpoint, this implies anticipated year-over-year growth of over 25%. We attribute our confidence largely to the traction we are seeing with our focused commercial strategy as we had planned this strategy designed to accelerate account productivity across our already meaningful footprint has resulted in one more existing treating centers with optimized Zephyr Valve programs; two, new treating centers launching with a greater ability to scale; and three, increased awareness around the benefits of our treatment among COPD physicians and the many patients, who stand to benefit from it. In the third quarter, average U.S. account productivity was approximately 4.7 cases per center despite anticipated summer seasonality. We attribute this largely to improvement in the number of highly…

Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended September 30, 2023, reached a new quarterly high of $17.7 million, a 31% increase from $13.5 million in the same period of the prior year and 29% on a constant currency basis. U.S. revenue in the third quarter reached a new record of $11.8 million, a 41% increase from $8.4 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr Valve therapy as well as less impact from seasonality compared to the prior year period. International revenue in the third quarter of 2023 was $5.8 million, a 14% increase from $5.1 million during the same period last year and a 9% increase on a constant currency basis. The overall increase in international sales was driven by growth of Zephyr Valve procedure volumes. Gross margin for the third quarter of 2023 was 74% compared to 75% in the prior year period, reflecting higher inventory reserves in the quarter. We expect gross margin for the remainder of 2023 to be approximately 74%. Total operating expenses for the third quarter of 2023 were $28.2 million, a 17% increase from $24.1 million in the third quarter of 2022. Non-cash stock-based compensation expense was $6 million in the third quarter of 2023. Excluding stock-based compensation expense, total operating expenses in the third quarter of 2023 increased 12% 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 $21 million of noncash stock-based compensation expense as we take a disciplined and prudent approach to managing expenses while contributing to invest to drive growth. R&D expenses for the third quarter…

So, in summary, I am very pleased with the way that we are executing our operational plans and with the resulting record third quarter results. We are confident in our long-term value proposition as we continue to drive increasingly predictable growth. Further, we are advancing key development projects and now entering Japan and in both ways are working to materially expand our already substantial addressable market. Finally, from a financial perspective, our revenue growth, strong balance sheet,and healthy gross margins together provide us a clear path to cash flow breakeven. With that, I'd like to thank you all for your attention, and we will now open the call for questions. Operator?

Certainly. [Operator Instructions] And our first question will come from Jason Bednar of Piper Sandler. Your line is open.

Hey. Good afternoon. Can you hear me okay?

Yes.

Great. Thanks. Congrats on the results in the quarter here, Glen. I want to go back to maybe the setup for -- as we came into third quarter from your comments three months ago in early August. You talked about maybe some concerns around seasonality in the third quarter, but you clearly out-executed your plan, which is really great to see. So maybe could you help us understand where the quarter may have gone as you expected? Did you see the seasonality hit procedure volumes in maybe July and August? And then was the upside in the quarter and the raised the guidance here today, was that simply to what you saw then play out in September and October? Is that the right way to think about just how things unfolded for the quarter and really got us to where we're at today?

Yes. Thanks, Jason. Yes, it was a very interesting quarter, and I remember talking to everybody sort of in early August, and July revealed a great deal of seasonality. And I think we probably signaled that when we were having those conversations. The good news is that August was not nearly as impacted as it was last year in the United States. And I think one of the things that's fundamentally different as it relates to the U.S. situation this year versus last or at least what it appears at this point is that a good bit of that, which didn't happen in the third quarter of last year, rolled into the fourth quarter. So you had these delays, you had people coming back from vacations and many cases they didn't get those procedures executed until into the fourth quarter. This year, in the third quarter, particularly in the U.S., though we had a delay in procedures in the early part of the quarter, they got completed later in the quarter. So I think that's the dynamic that explains the strength of this period unto itself and also how it contrasts to what we saw last year.

Okay. And maybe if I could just come back then on maybe a real-time comment, I mean, can you talk about maybe the exit rate in September or maybe what we're seeing here in early October and how that is contributing to the implied guidance here for the fourth quarter?

Well, the -- what specifically are you -- I mean I will give you as much detail as we traditionally provide in terms of inter-quarter results. But when you're talking about the implied guidance, can you be more specific?

I guess I'm wondering to what extent the momentum you had coming out of September, how that influenced what you're expecting now for the fourth quarter because this wasn't just a typical beat and flow through the raise to the full year guide, this was a beat and then raise by even more than the beat. So I don't want to speak for the rest of the Street, but I'm guessing that 4Q numbers are going to be moving higher today based on your updated guidance. So I'm trying to get a sense of how strong was that exit rate coming out of September that you were seeing in your business.

Yes. No. Our increase was greater than our beat for this quarter, but I think you'll recall we had some catching up to do. So there were a number of questions in the past about making adjustments, we made them now. So in any case, I think as we look ahead, we are encouraged by the performance in the third quarter. We were sobered a little bit by the idea that we didn't get any carryover into the fourth quarter in the way that we did last year. And we have a limited number of -- if there's a significant impact on the number of shipping days in the fourth quarter as well. So we feel good about the fourth quarter. We've always talked about that being a stronger relative quarter, but I think this third quarter performance is pushing up against that. And I think that's reflected in the overall guidance and what that implies as it relates to what we expect to do in the fourth quarter.

All right. Perfect. And then one other maybe commercial-focused one from us, but it will be a two-parter, so apologies in advance. So you've got these new center additions in the U.S. You've been running well ahead of your expectations from where you started the year, which again is also really good to see. So first, are you able to support this better new account activity because the core productivity improvements have been as strong as they have been, like we're just talking about in the last question? And then second part, given the commercial improvements you've made this year and the account activation adjustments that you've made, can you talk about maybe some context around the accounts that you've on-boarded this year, how they've scaled relative to the accounts that you on-boarded in 2021 or 2022? Just is there -- are you having more success in scaling these accounts because you have this new commercial program in place?

Yes. So with regard to the -- so first of all, the new additions are interesting. It's always great to bring these new centers on. I mean we're adding about one per territory per year. So we've got just -- we got 55 reps, will be 55 to 60 new accounts this year. With regard to our metrics, the addition of new -- of more greater-than-expected new accounts sort of dilutes the denominator in that regard. But with regard to our ability to absorb it, I think was what your question or comment was, this is kind of normal course activity, and we're not realizing any challenges with regard to our ability to absorb those accounts. Although I will say that as those accounts mature and they get to the one-year mark and they get included into our calculations, they are diluted. So an account -- though an account is much stronger at a year than it is at, say, three months, it's -- they still continue to expand. And so as the greater-than-anticipated number of new accounts roll in each quarter and to our denominator, it is dilutive to the overall number. Now you asked about the context of accounts today versus, say, two or three years ago and how productive those accounts are. We have -- and I think we've talked about this before, materially increased the number and height of the hurdles that accounts need to clear in order to become accounts today. We've learned a lot over the last few years. And so I would say that these accounts that come on board are much better prepared. I mean an example of it is the number of steps that a treating physician needs to go through in order to even get to training. They need to identify at least three patients in advance of training. They come to training, they discuss those patients, they go back and they treat the patients, and then they have a 45-day review with an expert. So I would say that one of the fundamental differences in terms of folks that are coming out of training today is that they're much better, they're much further along in terms of their understanding of things. Now going back to like does that translate directly into these accounts being way further along. I think it's super important to remember that there's a -step sort of process, and we take folks from step one through step six is what they're developing and they're clearing through gates along the way. That's a process that takes time, irrespective of how well trained the doctors are who enter into it. So I would simply say that I wouldn't anticipate material acceleration with regard to getting an account up to speed. But we have a whole array of examples of accounts that are very material contributors after only three months and others that take longer to come up to speed. So there's a bit of a spectrum.

Okay. Appreciate all the color and congrats again on the quarter.

[Operator Instructions] And our next question will be coming from Rick Wise of Stifel. Your line is open, Rick.

Good afternoon, Glenn, I just want to make sure I'm understanding a couple of things if you could just expand a little bit. The account productivity and implementation of best practice, you -- when you started your remarks, you talked about the number of accounts, you had a lot of momentum in accounts, and I think your words were with optimized Zephyr programs. And Glenn, I ask the question, you rephrase it if you feel like I'm not coming out in a clear way, but I say to myself, you came -- you ended last year with 278 total active accounts, if I am looking at it correctly. Today, what percent of those accounts have optimized Zephyr programs? You follow me? And the reason I'm asking the question is to get at are the 25% of those 278 have optimized programs and gosh, we've got a lot of room in a good way to keep driving greater productivity. That's what I'm trying to get at.

Yes. So first of all, an active account is one that's ordered in the last quarter, and the active number is in the low 70s as we talked about 73%, 74%. So in any given quarter, 73% or 74% of our accounts are ordering. If you were to say, in any six-month period, it will be about 85%. But in any case, the -- you said a year ago, we were at 278. I'll take your word for that. I don't know it off the top of my head. We're at 330 or something now. But the -- those are not all active accounts. That's the total number of accounts. So there's a subset of that, about 70% to 75% of those would be active accounts. So let's say, out of 200 active accounts, probably about 25% to 30% of those are what I would consider to be truly optimized. And the reference to optimization in my earlier comments was really the geographies in which, when I was commenting on sort of our plans for 2024, it was in those geographies where we would be making broader investments and trying to get the word out to the COPD physicians and the patients themselves. So we've been talking about the need to have the accounts ready first, then the referring physicians or the COPD physicians and then activating the patients.

Got you. I know it's early. It's hard to resist asking about 2024, especially given the momentum we saw in the third quarter. And especially when I hear you talk so clearly and positively about more accounts, account productivity, the patient and physician outreach and education and training. I mean do you -- I'm not so much looking for exact numerical guidance, feel free if you want to, but more, should we just assume that given all this, the outlook, the possibility, the likelihood of continuing in a kind of a 20% or better growth range, is there reasonable expectation based on everything we're hearing tonight?

Well, we feel really good about where our foundation is. We do have a number of things lined up and we feel good about that. But we're going to be providing you with specific guidance for 2024 in a few months here. And so we're not providing 2024 guidance. I know that a question was recently asked in one of these public forums about how we felt about next year and where people's heads were, and we continue to feel like you all are in the right place. But, so I'm not trying -- I wouldn't want to talk that down, but I also am not in a position to be talking it up. We've got some more information. I think the fourth quarter is going to be an important data set. And we'll spend a lot of time between now and when we -- when that all comes together to provide far greater clarity on how we see 2024.

That's great. Thank you, and it's great to see the excellent quarter.

[Operator Instructions] And our next question will be coming from Larry Biegelsen of Wells Fargo.

This is Charles on for Larry. First, congrats on the nice quarter. I had a couple of questions here. First, just on AeriSeal. It sounds like that's on track here, fully enrolled CONVERT 1, presenting the final data next year. I guess from there, I mean, that didn't convert to in your PMA submission, but how soon after completion, do you think we can expect OUS sales?

So CONVERT 1 is -- we're just following up. So it's fully enrolled. We're following up. We've got, I think, a one-year follow-up that we're going to put into our -- or I can't remember, it might be six months. In any case, we're planning on presenting those data at the European Respiratory Society Meeting. I think what you're alluding to is that we have a CE Mark in place already for AeriSeal and we have spoken about limited and then expanding over time, commercialization of AeriSeal in CE Mark regulated countries. Of course, convert two is on the critical path to getting AeriSeal available in the United States. So that's a separate matter. So we're going to go ahead and present those data, we'll get those published and then selectively sort of a limited launch, if you will, in various different locations. And the pacing of that will likely be informed by the rate of enrollment in European centers and convert to because we don't want to create -- we don't want to inhibit the ability to get that study enrolled quickly because we're commercializing in the hospital next door to a clinical trial center. So in any case, I don't have perfect information on that once we get CONVERT 2 underway and begin to scale. We'll have much greater resolution on exactly when and how we will be commercializing. But we will commercialized in CE Mark countries ahead of the commercialization of AeriSeal in the U.S.

Okay. And then just one follow-up. You announced recently -- so you're searching for a new CFO. Is there any update you could share on that or when the company might hope to have that search complete by?

We -- you are correct. We are in the process of trying to sort that matter out. We are in the process -- we have undertaken that process. We're going to find the right person and I do not have specific resolution on the timing. I will tell you that Derek had two extraordinarily strong lieutenants and one of them has stepped into the interim CFO role. John has been with us since the IPO, and he's been Controller and essentially Chief Accounting Officer for one or two other companies before that, publicly traded. So we're in good shape, but nonetheless, we are moving quickly, and we will -- but we will not compromise. So I don't know exactly what the timing will be.

Got it. Thank you. And again, congrats on a nice quarter.

Thank you.

[Operator instructions]. Our next question is going to come from Joanne Wuensch of Citi. Your line is open.

Thank you so much. And let me also say a very nice quarter. I want to talk about Japan and with reimbursement now in place and it's starting to contribute to revenue next year, how should we think about the launch and the expenses that are needed for that launch?

Okay. I'm going to probably -- I might pull John into part of that answer. But from -- yes, so we got reimbursement. So that's awesome. We couldn't be happier. It is a monumental path to go through that process or the entire review and approval and then reimbursement process. So as predicted by the end of this year, we said we would have it. We have it now, which is great. And what that does is it allows us to commence a post-approval trial. In every other country that I have been at worked in, you do that in parallel with initial commercialization. In Japan, you do it on the path to commercialization. So literally, the first 140 patients treated will be entered into a protocol. They will be revenue generating and there'll be expenses that go along with them, but revenue generating is a nice thing. It's -- we expect our revenue per patient to be in the range of our global sort of revenue per patient number. So -- we talk about very, very roughly $10,000 per patient. So 140 patients, about $1.4 million of revenue is expected. That's going to throw off a little cash to help pay for this commercialization. And John, I don't know if we break out our spending on Japan, but my guess is that the total cost -- incremental cost of commencing in Japan. We've already got the team in place. We've got some number of sales reps, marketing folks, general manager are already in place. So I don't know what we have incremental.

Yes, Glen, you're thinking about that the right way. We -- I'll reiterate that the patients we're treating in Japan are going to be revenue-generating patients and that the team that we have there is largely in place. Any -- their expense and any incremental expense will be factored into our 2024 guidance when we share that with you next quarter.

[Operator instructions] Our next question will be from Jon Young of Canaccord. Your line is open, Jon.

Hi, Glenn and John. Thanks for taking our question. And congrats on the quarter. Maybe to follow up on Joanne's question on Japan. How long do you anticipate it will take in all those for G20 patients in the postapproval study? And do you have to wait for any follow-up in the study before commencing the full commercialization in Japan?

So with regard to waiting, no.; my understanding is as soon as we enroll that 140th, we can -- we just don't want to see the data, but we won't be held up for three, six or 12 months before we can go to a broader launch. With regard to timing, as you probably know, clinical trials are -- tend to be back-end loaded, they take some time to get off the ground. And then they -- I think, probably half the patients come in, in the last quarter of the time that it takes to execute the trial. The good news for us is that we have -- since we had approval we were able to go out and engage with all the sites that we need to engage with. And I think most, if not all of the treating physicians have gone through a training program. I believe we sent global thought leaders in on at least two occasions into Japan that provide extensive training to those physicians. So we're lining things up. We had to -- this -- we had to get finalization of the protocol before it could be presented to ethics committees and so forth. So we haven't gotten all of the logistics and so forth out of the way. But we'll be pushing forward. I would guess best case a year probably could bleed into a second year as well. And I think in the coming quarters, we'll have significantly greater resolution for the -- because as I said, these things tend to be back-end loaded. So there's going to be a point in time where we're going to have a high degree of precision on when we see that -- do that closing out.

And then maybe just go back to some of the other questions on the optimized account base. Do you see certain types of centers, maybe like a strong academic center or certain geographies that are embracing the technology more and establishing those patient pathways. And I know you talked about clinical coordinators. Is it just a function of time? Or is it getting the interventional pulmonologist or COPD physicians to really champion there?

Yes. There's -- I think that the singular -- we feel really good about the process that we're running folks through. So you can kind of push folks along, guide them through the process. As we talked about before, these sensors represent 8% to 10% of the centers in the United States. And thus by definition, they're sort of committed to being in the lung space. It's not hard to get people to say they want to be -- they want to embrace best practices and so long as as they're interested in doing that. It does pivot a lot off of people and process, so making sure that we're investing in the right people at the right centers who are embracing what we see as best practices are all super important. But I mean, we -- there is no specific university hospital in a city of greater than three million patients or anything like that. We have really productive centers that would probably fall into six different buckets, places, fairly kind of the only game in town within three or four hours drive in certain parts of the Southeast and so forth that are incredibly productive referral centers where it's -- you just have a ton of patients that are in need of this that are seeking out that kind of care. We have university hospitals in major cities that are also sort of tertiary care referral centers, globally well-known treatment treating physicians and so forth. And there's an entire spectrum. And I think we've talked about some of these folks and some of the more constructive centers are outside of major cities where folks just don't want to drive down into the big city. And so 30, 40 miles outside of a big city, there's often a center that that people will stop in and get their procedure done as opposed to driving further and into a fairly intimidating place, which is most major cities for people who aren't familiar with them.

[Operator Instructions] Our next question will be coming from Alex Nowak of Craig-Hallum. Your line is open.

Hey, good afternoon, everyone. Maybe expand on the sales dynamic in Europe, just what is needed to really unlock more of the potential in the region? Because you already have a pretty good data over there. Is it reimbursement? Is it just more studies? Or is it really just an allocation of sales resources?

Okay. So the -- your -- so the -- I think the biggest explanation of the relative performance in the third quarter, between international and the U.S., is the impact of seasonality. Our international sales are mostly 80-plus percent are in Europe. And there was a fairly typical third quarter across Europe. So I would expect the fourth quarter to be stronger. And I think this was fairly predictable. There is -- we've got -- we're direct in 97% of our revenue on a global basis is correct. So we're -- we have the -- and we have considerable, not only sales, but also marketing, regional marketing resources. So I think we're good from that perspective. In terms of data, we've got four randomized controlled trials, all published. We're in the global guidelines. So it's not so much that. I think getting the word out in Europe and other countries is a bit more challenging than it is in the United States, largely because of either custom and/or law, and what is acceptable and not acceptable as it relates to direct-to-patient, direct-to-referring physician, even -- and the economic incentives for the treating physician are different. Where we are as it relates to executing outside the United States is we are embracing the things now that have been demonstrated to work in the United States and to the extent that we can leverage them outside the United States, we are focused on doing so. And I think probably our greatest success story OUS as it relates to that is the U.K., and it's easy to argue that in some ways, the U.K. -- the execution in the U.K. informed our strategies in the United States. So they're very much moving in the same direction, executing all of those things that they can embrace. And in the other larger countries we're sort of following the lead of the United States in terms of embracing some of these new approaches to the extent that they're allowable.

Okay. That is helpful. And then clarification on the CONVERGE studies. Aside from the geographies and the size, are there any major differences in the protocols between the 2 studies? Or can you really compare CONVERT 1 to get a proxy for what CONVERT 2 should look like?

With regard to -- I think the essence of your question is, the latter part of that question is do we think that CONVERT 1 and the results from CONVERT 1 will give us -- will be a significant risk reducer as it relates to the variability that may or may happen in CONVERT 2. And I think the answer is that we expect that the patients that we treat in CONVERT 2 will behave similarly to those that we treat in CONVERT 1. And we provided a window into some data that were disclosed at last year's European Respiratory Society meeting where the data indicated that nearly 80% of the time we tried to take a patient that was CV positive and make them CV negative, we were successful. So that was great. I would expect the CONVERT 1 data will remain in that neighborhood. And I would expect to CONVERT 2 numbers to be in that general neighborhood. Experts told us that it needed to be greater than 30% to 50%. So being up around 75% to 80% is a really good place to be. So we would expect that, that neighborhood will stay in. And then the question is -- that we also -- was also talked about last year was whether when you put valves in those patients, do they behave similarly to those that we treated across the four randomized controlled trials. And directionally, for sure, the answer is yes. So it's all good and encouraging. So I would expect the data that we see from CONVERT 1 to give us a good bit of confidence as to what we might see in CONVERT 2. It's not an identical study, but it should answer that question in the way I think you're asking it.

And I'm showing no further questions. I would now like to turn the conference back to Glen for closing remarks.

All right, Great. Well, thank you all very much for your time. We are -- we couldn't be more pleased with the way the quarter went and the way that the plan seems to resonate, not only for us but for our customers. So I'd like to thank you all again for your time and attention and wish you a good evening.

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