Good day, and thank you for standing by. Welcome to Pulmonx Q1 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Elizabeth Sparicio, Investor Relations at the Gilmartin Group.

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 March 31, 2024. A copy of the press release is available on Pulmonx' 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-K filed with the SEC on February 27, 2024. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference contains time-sensitive information that is accurate only as of the live broadcast today, May 1, 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.

Thanks, Elizabeth. Good afternoon, everyone, and welcome to our first quarter 2024 earnings call. Here with me is Mehul Joshi, our Chief Financial Officer. I am pleased to report that Pulmonx delivered $18.9 million in worldwide sales in the first quarter of 2024, representing 30% growth over the same period last year and 29% on a constant currency basis. We're excited to see such strong momentum early in this year, which leaves us increasingly confident in our ability to deliver on our previously communicated revenue guidance of $81 million to $84 million for the full year 2024. Our Q1 results reflect our team's continued success in executing a comprehensive strategy to drive long-term sustainable growth, and I look forward to sharing with you today key updates on our progress. Before detailing our performance and key priorities, I'd like to speak about some of the recent leadership changes at Pulmonx. First, I'd like to congratulate Glen French on his retirement and thank him for his innumerable contributions to the company, and the interventional pulmonology more broadly, through his long tenure in the space and while serving as our CEO. Glen and I have worked closely over the last few months to ensure an exceptionally smooth transition, and I look forward to our continued collaboration as he maintains his position on our Board of Directors. Second, I'd like to welcome Mehul Joshi to our team. Appointing an accomplished financial executive as CFO was a high priority for our Board and myself, and I'm delighted to have hired an experienced industry veteran for the role. Mehul brings a depth of knowledge leading global finance teams within high-growth companies, such as Gilead and ResMed, as they scale revenue and operating leverage. I'm thrilled to be working alongside him and our broader leadership team to…

Thank you, Steve, and good afternoon, everyone. Before I review our first quarter results and guidance for 2024, I want to expand on Steve's comments and highlight why I'm excited to have joined Pulmonx at such a pivotal time. For the past few decades, I have dedicated much of my career to driving sustained profitable growth within innovative health care companies. As Steve alluded to, Pulmonx represents a unique opportunity as the leading innovator with a differentiated technology platform in a market that has been significantly underserved. In the last year, the team at Pulmonx has demonstrated its ability to deliver meaningful growth and, in my view, position the company well from both an operational and financial perspective for continued success. With a strong balance sheet and increasingly focused execution, I believe Pulmonx is well poised to continue bringing life-changing solutions to patients in need while also achieving continued revenue growth and delivering profitability. And with that, I will move on to our financial results. Total worldwide revenue for the 3 months ended March 31, 2024, was $18.9 million, a 30% increase from $14.5 million in the same period of the prior year and an increase of 29% on a constant currency basis. Our strong performance was driven by sustained momentum across the U.S. as well as a rebound in our international markets as we continue to optimize our commercial infrastructure and introduce new tools and capabilities. U.S. revenue in the first quarter was $12.9 million, a 38% increase from $9.3 million during the prior year period. International revenue in the first quarter of 2024 was $6.0 million, a 15% increase from $5.2 million during the same period last year and an increase of 13% on a constant currency basis. Gross margin for the first quarter of 2024 was 75%…

[Operator Instructions] Our first question comes from the line of Joanne Wuensch from Citi.

This is actually Anthony on for Joanne. I guess, first, on the guidance, you beat by about $1 million, which was similar to previous quarters, but you hit the range. Just curious if this is more conservatism, should we be thinking about maybe closer to the higher end of the range? And then the second question, can you just talk about what you're seeing so far this quarter in terms of operating activity, account productivity and procedure volumes?

Yes. Anthony, this is Mehul Joshi. I'd say we are very pleased with our Q1 performance. There was underlying strength in the U.S. with continued commercial execution that drove account productivity. The OUS business rebounded as most of our major markets grew, and that's a result of increased sales capability and implementation of process and tools that is in process right now. The Q1 results are enabling us to be increasingly confident in the annual revenue guidance. I think it's still a little early in the fiscal year and we don't want to really get ahead of ourselves and want to see continued momentum and commercial traction.

As far as the account productivity goes, I'll jump in there. We continue to see improvement in productivity from our accounts. I think as you look at that metric, it's a little bit of a skewed metric. There's a number of different puts and takes there. But as we look at the metric itself, we did see about 10% improvement in productivity in our account base. I think as we look moving forward, I think U.S. revenue growth is probably a better metric to focus on to show the progress of the organization.

Our next question comes from the line of John Young from Canaccord.

Steve, Mehul, can you hear me okay?

Yes.

Congrats on the quarter. Steve, it sounds like as you're reviewing the strategic priorities of the company since being the CEO since March, it kind of sounds like steady as it goes right now. Do you expect to have any large changes to strategy going forward? Or do you think you'll finish your evaluation phase at this point?

John, thanks for the question. I think it's a good question. As I look at the strategy that's in place, I think it's the right strategy. I think we've shown growth or the company has shown growth over prior quarters, and it's been effective. I think over time, we'll probably make some small refinements or add some specificity to different arms of it over time. But I think all in all, our ability to bring on accounts that can be big Zephyr Valve users or big Zephyr Valve treatment centers is important. We'll continue to do that. I think driving efficiency and really the ability for these to facilitate best practices among the accounts that are already up and running is really an area of focus for us. I think that's something that we've seen significant progress. And then third, obviously, we'll still look to drive COPD physician awareness and patient awareness over time. So to answer the question specifically, I think the strategy is the right strategy. It just might need some fine-tuning here and there.

Great. As you came in with fresh eyes, too, what are your thoughts on M&A? Do you see potential on the products that you can add to the bag in the long term at either the COPD physician or the interventional pulmonology call point?

Yes, it's a good question. As we look at the IP space and you look at our sales force, we get the question quite a bit. And I've got my eyes open to different technologies that are out in this space that could fit in the bag. But right now, if you look at the size of the untapped market that we're going after, and really the progress we're starting to make and the physician buy-in that we're seeing, we've got patients that are motivated, I think the opportunity in front of us is really a great one. So I wouldn't say no to M&A, but I will say that we're going to focus on executing the strategy that's out in front of us right now. Thank you, John.

Our next question comes from the line of Rick Wise from Stifel.

Gentlemen, welcome to you both. Steve, maybe to start off with a high-level question, and then I'll ask a financial question. You talked about the three-pronged approach, and you sort of touched on it a little bit earlier. But I'd be curious, given your unique background and your experience, inevitably, you're looking at things with fresh eyes and also bringing your unique background, where do you think you walk in? And where is the low-hanging fruit through your experience prism, if you will, and you think, "Well, I really think we can accelerate." Is it literally the thoughts on strategy about uptake in existing accounts? Just if you see what I'm getting at.

I do, Rick. And thanks for the question. It's a very good one. I've been able to spend some time in the field and spoke to physicians. I've been able to speak to hospital administrators. I spent time with our sales force as well as the sales management team. And it's really interesting because it's different account by account. And that's what we've seen across the country. And I'll give you a couple of examples, if I can. I was at an account on the East Coast. We consider them a high-volume Zephyr Valve user. Now at that account, they don't really have the clinical coordination and the navigation and the efficient processes in place to continue to grow that as quickly as they could. You've got physicians that want to do it, but they don't have the infrastructure and support in place to do it. The flip side of that is I go to an account in the Midwest, and they've got 2 clinical coordinators. They've got a nurse practitioner. They have multiple physicians that are doing Zephyr Valves. And really, they'll benefit from COPD physician awareness in the market as well as patient awareness. So it's totally a different strategy there. And then even taking a little bit further, a highly prestigious university hospital here on the West Coast was in the office yesterday. I was speaking with one of the interventional pulmonologists there, and you have a really eager physician that's looking to continue to grow the practice. They have the strong clinical and operational foundations that they need in order to do so. They would benefit from COPD physician awareness in the marketplace to let the market know that they are actually doing procedures at this facility. So each one has different needs. I think that gets to my thoughts on strategy where we need to put a little bit more specificity into a couple of areas and really define that path specifically depending on where that account is along the sales process.

Got you. And again, one more high level. You highlighted making the innovation pipeline a priority. There's obviously an innovation pipeline in place. I mean it sounds like probably M&A is not going to be a big near-term priority given everything else going on. But what do you mean by that innovation pipeline? Is there something beyond what we know and you're not ready to talk about it? Or are there opportunities to invest internally and drive innovation in some way that we're not appreciating?

Not really. There's nothing that's some secret program that we're working on right now. We're really focused on the AeriSeal clinical trial. I think there's a lot of innovation with that product, and I think it's going to open our TAM up significantly over time. So that's part of the innovation I'm talking about. I think our ability to continue to innovate our current product offering, make certain components easier to use or just refinements from a sustaining perspective are very important over time. Ease of use is obviously a big driver for adoption, and so we want to continue to make the procedure as easy as possible for our physicians. So we'll continue with sustaining work in that area. And then as we go through and develop the strat plan and spend more time on that, there may be other areas that we go after. But right now, the primary innovation that we're looking at from an R&D perspective is AeriSeal and some kind of sustaining improvements. I think more broadly, when you think about innovation, there's ways that we can innovate the way that we interact with physicians, the way that we interact with patients, so marketing innovation. And also, I think you've seen the innovation from our sales perspective and the sales process that's in place. So we're looking to innovate across the organization, coming up with creative ways to get after this really large TAM, this big, untapped market, with physicians that want to do more procedures, with motivated patients that will advocate for themselves. And in most cases, we have administrative buy-in as well. So it seems like all the pieces are in place. We just have to innovate that workflow and the process to get these customers up and get their productivity continuing to grow.

Got you. And just Mehul, if I could ask a third here. Gross margins came in 100 basis points, better than I was looking for this quarter. And I looked back at last year, and I appreciate it's not a perfect example, maybe that gross margins sort of stepped up first quarter to the second quarter and sort of stayed there basically at the 74% or better level in the last 3 quarters. Why are we still thinking at that 74%, 75%? What gets you to at or above the upper end of that range? Just your perspective would be very welcome.

Yes. Thanks, Rick, and nice to meet you. I'd say our Q1 gross margins were driven primarily by a favorable geographic mix, so U.S. to OUS revenue. We had about 68% of our revenue coming from the U.S. and the rest of it is from OUS, so that helps quite a bit on the gross margin side. And then we also had some higher manufacturing capacity utilization, which helps. So that's what raised the number in Q1. And it's 30, 40 basis points, right? That rounds up to 75%. We did see some benefit mostly from geographic mix. But as we get into the second half of the year, and that's what we've guided to that we expect higher volumes to move through the factory, that is the primary driver in increasing gross margins. So geo mix will also help, but that's, again, volume-based and then better utilization. So that's what we expect in the second half of this fiscal year to drive gross margins up to 75%.

[Operator Instructions] Our next question comes from the line of Larry Biegelsen from Wells Fargo.

This is Vik Chopra in for Larry Biegelsen. Welcome, Steve and Mehul. So maybe just two questions for me. Steve, one for you. You talked a little bit about your priorities over the next year. Maybe you can talk about what would success look like for you in the next 12 months. And then I had a follow-up, please.

Sure. We've got an aggressive program in front of us. I think we've got a new sales process that's in place. We're doing quite a bit from a clinical perspective, both with our CONVERT II trial as well as our Japanese post-approval study; and ongoing, from a marketing perspective, reaching out and doing more training from a COPD position; and patient perspective, raising awareness there. So I think good for me, looks like continued progress in all of those areas. As I said, I believe in the plan that's in place and execution of that plan, and our ability to do so would be a big win for us.

And if I can add in, we also want to make sure that we're meeting or beating our guidance and really focus on driving operating leverage through our P&L and through our business.

Great. Helpful. A good transition to my next question as well. You lowered your OpEx guidance for the year this afternoon. Maybe just talk about what's driving that.

Yes. Sure. So when we set guidance in February, we assumed an accounting methodology for SBC expenses for an executive transition. And as we continue to evaluate that and close the books for the quarter, we had a methodology change. I mean, SBC is a noncash expense, so it was a methodology change that was affirmed by our auditors, and that's what drove the reduction in the SBC guide. Non-OpEx guidance stayed the same. I mean non-SBC OpEx guidance stayed the same, but we're still managing to that number, which is around 12% year-on-year growth. And that's investing in not only our commercial activity but also in the clinical trials and the R&D initiatives that we have underway.

I would now like to turn the conference back over to Steven Williamson for closing remarks.

Thank you, operator. To conclude, we had a great first quarter, and I'd like to take a moment to thank Pulmonx employees worldwide for their continued dedication to helping patients with severe emphysema, breathe easier, do more and to lead fuller lives. I think this is really a great time to be at Pulmonx. And with that, thank you all for your time, and have a great rest of your day.

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