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TransMedics Group, Inc. (NASDAQ:TMDX) Q3 2023 Earnings Call Transcript

TransMedics Group, Inc. (NASDAQ:TMDX) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good afternoon, and welcome to TransMedics Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Brian Johnston from the Gilmartin Group for a few introductory comments.

Brian Johnston: Thank you. Earlier today TransMedics released financial results for the quarter ended September 30th, 2023. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that, management will make statements during this call, including during the question-and-answer portion of the call that include forward-looking statements within the meaning of Federal Securities laws. 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, are examination of operating trends, the potential commercial opportunity for our products, and our future financial expectations, which include expectations for growth in our organization and guidance and or expectations for revenue, gross margins, and operating expenses in 2023 and beyond are based upon our current assumptions and estimates.

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. Additional information regarding these risks and uncertainties appears under the heading Risk Factors on our Form 10-K filed with the Securities and Exchange Commission on February 27th, 2023, our subsequent form 10-Q filings and the forward-looking statements included in today's press release which is available at our website and at TransMedics 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.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today November 6th, 2023. And with that, I'll now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Waleed Hassanein: Thank you, Brian. Good afternoon, everyone, and welcome to TransMedics third quarter 2023 earnings call. As always, joining me today is Steven Gordon, our Chief Financial sir. The third quarter was an important foundation-building quarter for TransMedics. We closed two strategic acquisitions. One to position us for near-term growth with the Summit Aviation and one to position us for long-term growth with Bridge to Life Technologies. Following the acquisition of Summit Aviation in August, our team worked diligently to meet our goal to try to initiate a limited launch of our transplant logistics service in late 3Q. We met this goal, and we started seeing early positive impact of logistics on revenue, on catalyzing NOP volume, and overall clinical adoption.

This early momentum, combined with sustained growth demand for all three organ markets and solid OUS performance, enabled us to achieve significant growth in 3Q. This was achieved despite operational and resource challenges, we outlined in our second quarter call. Here are the summary results for 3Q. Our total revenue was $66.4 million, representing 159% growth over the same period in 2022 and 27% sequential quarter-over-quarter growth from 2Q 2023. $64 million of the total $66.4 million was from transplant-related activities including approximately $2.1 million in NOP aviation and logistics-related revenue. We are thrilled by the early performance of our transplant aviation and logistics service. As it praises our confidence in our long-term plan, which I will cover later in the presentation today.

Approximately, $2.4 million of the total revenue was attributable to Legacy Summit Charter and Flight School operations. As we have stated before, we intend to exit the legacy charter business with diminishing contribution in Q4 before a full exit in early 2024. Meanwhile, we will maintain our Flight School revenue which will continue to be a part of our P&L going forward. Stephen will detail associated P&L impacts in his section of today's call. Our team did a great job executing on all fronts. 3Q performance speaks volumes to their hard work, dedication, and creativity. I want to take a moment and acknowledge our entire team at TransMedics for their efforts to help us to achieve these great results. Now let me cover the specifics of Q3. Inline with our growth strategy, we grew revenue across all three organ markets in the U.S. compared to 2Q.

OUS revenues also grew sequentially. Stephen will cover the detail in his section of today's call. Given the success of the NOP program and the flexibility it affords U.S. transplant programs to use it, going forward, we will primarily focus on the organ-specific revenue trends quarter-over-quarter instead of the number of centers. Let me repeat again. Going forward, we will primarily focus on organ-specific revenue trends quarter-over-quarter instead of the number of centers. This is because we no longer believe or see center numbers as an accurate predictor of growth in the NOP era. Beyond strong revenue growth, we also demonstrated continued operational efficiencies in 3Q, as we continue to benefit from increasing scale and making further progress towards positive cash flow and profitability.

In terms of NOP, we met our stated goal of having NOP contribute the lion's share of our U.S. revenue in 3Q. As we reached an all-time high of 97% NOP contribution of total U.S. cases. On a per organ basis, approximately 98% of liver, 93% of heart, and 97% of lung cases were from NOP in 3Q. Given this success, we fully expect that we will transition out of the shrinking direct acquisition model in 2024. To meet the growing demand for NOP and to overcome our clinical support staffing shortage we discussed in 2Q, we added 45 new clinical specialists and 10 surgeons in 3Q. We will continue to invest in this area throughout the remainder of '23 and in early '24 to prepare for the expected growth in '24 and beyond. From a volume perspective, we are well on our way to reaching our stated goal of completing more than 2000 U.S. NOP transplants in 2023.

This would represent more than doubling of our case volume from 2022. Let me now turn to a more detailed discussion on our new logistics business. As we described on our 2Q call, TransMedics set out to develop a more efficient national transplant logistics model in the U.S. Our goal is to control the entire end-to-end process of donor-to-recipient logistics for all NOP transplant volume in the U.S. by the second half of 2024. By way of background and as and reminder, approximately 75% to 80% of NOP heart, lung, and liver transplants require private charter air transportation to move transplant teams and organs from donor to recipients. The rapid expansion of NOP, the increase in distance afforded by the protective effect of the OCS technology, and our experience operating the NOP model in the U.S. over the past 18 months have clearly shown us that, the current industry model is inefficient and unscalable in the era of NOP and the new national allocation laws.

Our vision is that, with a TransMedics developed and operated world-class, efficient transplant dedicated logistics service, we can meaningfully drive additional growth of our NOP case volume and fueling overall revenue growth. Late in Q3, we initiated a limited launch of our new transplant logistics business with aviation to solve these inefficiencies and support and expand our NOP case volume. We are extremely pleased with the early results. Despite expected early growing pains and inefficiencies, as we integrate the summit operation, 3Q truly represents the first inning of this important new TransMedics business offering. So far, we are thrilled by the early encouraging results. We are in the process of building out the feet, and adding additional staff to operate the fleet efficiently.

As of today, we have acquired eight planes. We plan to expand our fleet to around 15 to 20 operational planes by the second half of 2024. Rest assured that we will continue to assess this need based on data-driven approach. We have also initiated the build-out of our logistics digital command and dispatch center in Andover, Massachusetts. And we expect it to be fully operational by Q1 of '24. This is important, as it will drive significant efficiency to the dispatch operation for NOP clinical and logistical resources. I want to affirm that, based on everything we know today, we are extremely confident and bullish on the potential positive impact of transplant logistics service on the growth of our NOP case volume and more efficient utilization of our clinical resources.

A surgeon in a modern operating theatre performing a transplant surgery with medical technology.
A surgeon in a modern operating theatre performing a transplant surgery with medical technology.

Before I move on from logistics aviation, let me share our expectations on our gross margin progression going forward in 3Q. The inefficiencies associated with integrating Summit and streamlining the entire operation to focus in transplant was a bit of a headwind on our service margin. We expect this to improve over the next few quarters. Let me be crystal clear, we fully expect both our product and service margins to improve over the next several quarters as we gain more operational leverage and efficiency. Simply stated, 3Q margins do not, I repeat, do not represent our long-term margins at all. The expected inefficiencies of integration -- I simply stated 3Q margins do not represent our long-term margins at all, given the expected inefficiencies of integration and transitioning of the summit operations.

Now let me turn to our mid and long-term plans. As we stated in our last call, we have a multifaceted strategy to leverage some of the technologies we acquired from Bridge to Life to accelerate our OCS NextGen program and expand our product offering. Our goal is to leverage these technologies and new clinical programs to drive our mid and long-term growth in NOP case volume to reach our stated goal of performing 10,000 NOP cases in the US by 2028. We hope to have more to share about these new technologies and its associated clinical programs later in 2024. We are continuing to drive our business forward and for the seventh consecutive quarter, we have demonstrated that we can grow our revenue and adoption of our OCS NOP cases. We are on track to meet our stated goal of doubling our NOP transplants to more than 2,000 in 2023.

We are not stopping here, however, as we are determined to reach our goal of 10,000 transplants over the next five years. Given our strong 3Q results, balanced with potential scalability challenges, we are increasing our annual revenue guidance for the full year ‘23 to be between $222 million and $230 million up from our previously communicated guidance of $180 million to $190 million and representing 138% to 146% growth over the full year 2022 total revenue. With that, let me turn the call to Steven to cover the detailed financial results of the quarter. Steven?

Stephen Gordon : Thank you, Waleed. I will now detail our Q3 results and provide supplemental financial information for the quarter. Given the two acquisitions and evolving business model, I will move through the dialogue carefully and try to touch on all relevant points. Starting with revenue. For the third quarter of 2023, our total revenue with $66.4 million, this is an increase of 159% from the third quarter of 2022 and a 27% sequential increase from last quarter. Of note, the $66.4 million of revenue for the quarter included $1.6 million of revenue related to Summit Aviation's legacy charter business. A legacy charter business is in the process of transitioning and we intend to exit by early 2024. We expect the charter revenue should be minimal in Q4 and zero as we enter 2024.

The $66.4 million of revenue also includes about $800,000 of revenue related to the flight school that was part of our acquisition of Summit Aviation. So, taking into account the charter and flight school revenue, transplant-related revenue was $64 million. Now, as Waleed mentioned, included in this $64 million was our first transplant-related logistics revenue of $2.1 million. This logistics revenue was derived from missions that utilized our own logistics network. In the past, our hospitals, our hospital customers would've paid this to other logistics brokers, but this is now part of the service that we are providing. So, we feel that $2.1 million in less than a full quarter is a very good start. In the U.S., US transplant revenue for the quarter was $59.7 million.

That's 156% growth from Q3 of 2022, and this includes the $2.1 million of logistics revenue. The organ breakdown on U.S. revenue was $41.2 million of liver, $15.1 million of heart, and $3.4 million of lung. So, let me just repeat that, $41.2 million of liver, $15.1 million of heart, and $3.4 million of lung. Ex-U.S. revenue was $4.3 million, it was $3.9 million of heart $0.3 million of lung, and $0.1 million of liver. Now, regarding the breakout of product and service revenue this quarter, service revenue is growing given the introduction of logistics and aviation. So, product revenue was $47.7 million in Q3 of 2023, and service revenue was $18.7 million. And just reiterating the service revenue includes the $2.4 million of non-transplant related revenue as part of the summit acquisition, $1.6 million of the charter that's being transitioned out by 2024 -- early 2024, and $0.8 million of the flight school revenue.

This we expect to recur, but it's not likely to grow. So, the flight school will be less material as our transplant revenue grows. Now turning to gross margin. Gross margin for the third quarter of 2023 was 61%, and as Waleed mentioned, this is lower than the Q2 of 2023 due to transient inefficiencies related to the summit acquisition and limited launch of our transplant logistics offering. Beyond the integration, margin was also unfavorably impacted by legacy charter operations as we transition to focus exclusively on transplant missions. So, our service margin was impacted by both of these. We had the old charter business trailing off, and we have the new transplant business beginning, but neither one was at scale in the quarter. In general, the higher mix of service does reduce the overall business gross margin.

However, we fully expect the gross margin to improve in the coming quarters. In simple and mathematical terms, our product margin this quarter was 77%, and we expect this to improve into the 80% range over the next few quarters, and the service margin was 21% in Q3. We also expect this to improve over the next few quarters to the low to mid 30% range. The mix in the quarter was 72% product and 28% service. In the future, we expect the mix to be about 70-30 product and service, which would equate to about a mid to upper 60% range for gross margin in the overall business. Very much in line with our expectations. So, we do expect and are very confident that the gross margin will improve over the next several quarters, starting in Q4 and into 2024.

Given the higher mix of service in our business, we believe a mid to upper 60s gross margin is a reasonable, steady state. And of course, as our logistics allows us to open up more cases and more product sales, the overall gross profit dollar contribution will be significantly higher than if we were not using our own logistics network. And this was true in this quarter Q3 that we just finished as well. Moving on to expenses. Total operating expenses for the third quarter of 2023 were $69 million. However, operating expenses include two acquisition transition, excuse me, two acquisition transaction-specific impacts. First, we have $27.2 million of acquired in process research and development expenses, related to our acquisition of the Bridge to Life Technologies.

And secondly, included in SG&A is approximately $2.2 million of other acquisition-related expenses. Now if we normalize for these two items, our underlying operating expense was $39.8 million. This is 68% above the third quarter of 2022 and 6% sequential growth from Q2 of '23. We have continued to make critical investments in the company to ensure scalability for growth, and to support future growth, while still growing expenses at a much lower rate than revenue. Our operating loss was $28.3 million in the quarter of 2023 compared to $5.5 million in third quarter of 2022. Taking into consideration the two transaction-specific expense items I mentioned earlier, our operating income would have been just above breakeven for the quarter, about $900,000.

Our net loss for the third quarter of 2023 was $25.4 million, compared to $7.4 million in the third quarter of '22. Total cash was $427.1 million as of September 30th, 2023. In the quarter, we spent $42.1 million on the two business acquisitions, as well as approximately $103 million on eight jets that were added to our transplant logistics fleet. We are depreciating these jets over 10 years with a 50% residual value. Finally, weighted-average common shares outstanding for the quarter were $32.6 million. Overall, we are extremely pleased with our Q3 financial results. We have demonstrated adding our own aviation and logistics offering in Q3 allowed us to continue growing revenue at a strong pace. While we saw some headwinds on gross margin in this transitional quarter, I have full confidence in our ability to grow the gross margin to the mid-60s, as we have described after integrating our logistics offering.

And this change in our business also showed that even with a lower gross margin, the gross profit dollars are growing, which clearly puts us on a path to profitability. As a concluding statement, I will repeat our updated revenue guidance for 2023 for $222 million to $230 million, which represents 138% to 146% growth. Now, I would like to turn the call back to Waleed for closing statements.

Waleed Hassanein: Thank you, Steven. Overall, the third quarter was a critical execution period for TransMedics, as we integrated a new business, Summit Aviation, expanded our NOP clinical support capacity, and launched a first of its kind business to expand our NOP product and service offering. Despite the great results achieved, we firmly believe that, we are steadying up a great foundation to further accelerate our growth in '24 and beyond. We are extremely confident in our strategy and our ability our execute it to achieved our stated goal of 10,000 NOP transplant mission by 2028. With that, I will now turn the call to the operator for Q&A. Operator.

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