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spk05: Good afternoon, and welcome to Transmedic's first 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 of 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 Johnson from the Gilmartin Group for a few introductory comments. Thank you.
spk04: Earlier today, Transmedics released financial results for the quarter ended March 31st, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call, including during the question and answer portion, 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 under expectations for revenue, gross margin, and operating expenses in 2023 are based upon 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 to 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 27, 2023, and our subsequent filings with the Securities and Exchange Commission, which are available at www.sec.gov and on our website at www.transmedics.com. 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, May 1st, 2023. And with that, I'll turn the call over to Waleed Hassaneen, President and Chief Executive Officer.
spk02: Thank you, Brian. Good afternoon, everyone, and welcome to Transmedics' first quarter 2023 earnings call. As always, joining me today is Stephen Gordon, our Chief Financial Officer. Since our last update, we have continued building on our strong 2022 performance, making progress on many of our previously outlined growth goals for 2023. I'm thrilled to report that our first quarter results demonstrated significant commercial momentum and accelerated clinical adoption through the Transmedics NOP. Importantly, In Q1, we also made progress in scaling our supply capacity of our OCS perfusion modules. Here are the top-line results. In Q1, we achieved total revenue of $41.6 million, representing 162% year-over-year growth and 32% growth over 4Q 2022. As predicted, NOP continued to be the primary driver for our revenue growth. a trend we expect to continue for the foreseeable future. Importantly, we also demonstrated continued improvement down the P&L as we benefited from increasing operating leverage, which Stephen will detail in his section of today's call. Before I move on to discuss the 1Q details, I would like to take a moment to mention that Transmedics has released our first annual ESG report, which was published this morning on our website. Now, let me move on and provide some more granular highlights on 1Q 2023. Overall, 1Q represented another new high watermark for case volume, driven by liver and heart cases, which increased sequentially for the fifth consecutive quarter. Meanwhile, lung volumes continued to lag as we worked to help rebuild this very important market. In line with our outline growth strategy, we also grew the number of liver and heart transplant programs using OCS and NOP. There were 32 liver programs that used OCS and NOP in one cube, of which 15 were active repeat users. For heart, there were 40 programs that used OCS and NOP, of which 11 were active and repeat users. There were nine lung programs that used the OCS and NOP, of which six were repeat users. We're not concerned by the lung-centered trend given the small numbers and our previous guidance that our initiatives will take approximately 12 to 18 months to materially impact lung program growth. In terms of the NOP contribution, approximately 91% of our total U.S. case volume came from NOP. On a per-organ basis, approximately 96% of liver, 83% of heart, and 91% of lung cases were from NOP program. We view these NOP penetration rates as very encouraging and in line with our goal of having Transmedics NOP managing the lion's share of U.S. transplant volume over the next several years. In 1Q, we also began to increase production and sterilization capacity. The increase was driven primarily by the scaling of our second shift in our operational existing cleanroom. We expect to see further gradual capacity expansion as we bring our new cleanroom online and fully operational. Given that we received FDA certification of our new cleanroom in one queue, we are confident that the timeline for the new cleanroom to be operational remains on track for late Q2. Our 1Q results clearly demonstrated the fast pace of growing clinical demand for our OCS technology and the NOP service model. We remain laser focused on bolstering our supply chain and NOP infrastructure to sustain and further accelerate our growth. Let me outline our key focus areas to keep up with this accelerated demand, specifically on OCS production availability and NOP infrastructure capacity. So first, production and product availability. As mentioned, we're continuing to invest in our manufacturing capacity and supply chain to ensure continuous product availability. More specifically, we are enhancing production and sterilization capacity, as well as raw material supply chain management. For production and sterilization capacity, As stated, we are on track to bring our new clean room production space online by mid-year, but we are not stopping here. We have already secured additional new space in our current facility to support the increased production build, as well as raw material and finished goods inventory growth. In addition, we are working with specialized third-party workflow optimization experts to revamp our production process workflow to maximize efficiencies within both clean room spaces. Lastly, we are significantly increasing our sterilization capabilities by qualifying a brand new major sterilizer while working to expand the capacity and the throughput of our current sterilization partners. this expanded sterilization capacity will be online in H2 2023. For raw material management, historically, we've never had a raw material shortage. However, as we are significantly increasing our production capacity to meet the growing clinical demand for OCS technology, we have established a new dedicated raw material planning and monitoring team within our operations team. This new team This new team's function is to establish a scalable process to closely track our growing demand for raw material and proactively replenish our raw material to meet our near, mid, and long-term needs. Second, we'll continue to expand our NOP infrastructure. Specifically, we will grow our surgical and field clinical staffing throughout the next 12 to 18 months, to meet the growing demand for the NOP clinical services across the U.S. We are also planning to opportunistically add two to three new launch points later this year to expand our coverage and reach larger pools of potential donors faster and more efficiently. Next, we will revamp and scale the logistical management of the NOP case flow. we have recruited a senior logistics executive from Amazon to lead our initiative to streamline, scale, and digitize the entire logistical workflow of our NOP program, literally starting from the initial transplant center's call to the NOP hotline through the organ arriving at the transplant center. One key feature of this exciting new initiative is creating a digital central command and control and dispatch center. I'm sorry, creating a digital central command control and dispatch center here in Andover to oversee and manage our national NOP workload. We hope to start sharing more granular detail on this exciting initiative towards the end of 2023. Additionally, We announced at ISHLT in April that we are planning for the launch of our customer-facing portion of the Transmedics OCS Connect application. This is a secure and HIPAA-compliant app that will provide surgeons and clinicians with real-time updates on the overall status of the organ on OCS, as well as logistics and travel time information. It will also enable secure real-time communication of case information between our team managing the organ and the transplant program clinical staff. We are very excited about this new function of our OCS Connect, and we hope it will provide more transparency and confidence to our users about the status of their organs en route to the transplant center. Finally, and as we have stated several times, We fully intend to eventually control the entire air and ground transport function for the NOP transplant cases. This will help remove a critical bottleneck for our growth. We are seeing our NOP volumes are starting to outpace the capacity, the availability, and flight radius of the fragmented transplant air charter model that we and the transplant programs are using today. We also announced at ISHLT that we expect to launch this important transmedics aviation initiative sometime in H2 2023. We are actively engaged on several fronts to establish a national dedicated NOP transplant charter flight network to cover our existing and potential new hubs. I'm looking forward to discussing this exciting initiative further in the latter half of this year. In the meantime, please allow me to take this opportunity to discuss in detail and clarify the current way of air transportation for organ transplants in the United States. To start, it is important to recognize that all, I repeat, all air transport for hearts, lungs, and liver transplants in the United States are transported via charter flights. These flights costs are a part of the organ acquisition cost center and are an allowed charge for the CMS cost report. All commercial transplant payers and CMS routinely reimburse these costs. Historically, when organ transport was limited to a short distance within the donor service area, or DSA, of the involved organ procurement organization, or OPO, The OPOs were the main flight coordinators for the transplant programs. Consequently, a few OPOs purchased their own short-range aircrafts to manage local travel. Back then, more than 90% of donor organ allocation came from the transplant program's local OPO DSA, literally less than 250 miles. And only less than 10% came from outside of the local DSA. Today, the reality is the complete opposite. Let me explain why and how. Approximately five or six years ago, organ allocation for lungs, hearts, and liver transplants shifted from regional to national allocation in the United States. This effectively means that a donor in San Francisco can and should be allocated to the matched recipient in Boston or New York or Raleigh-Durham, North Carolina. With that change, the rate of organ acceptance by nearly all the leading transplant centers flipped overnight to more than 90% national or distant allocation and only less than 10% local allocation. This led to many OPOs selling their jets and shifting most of the responsibility, if not all the responsibility, of air transport coordination back to the transplant programs. To make this more interesting, between 2020 and 2022, the OCS technology became FDA approved in the United States, and the NOP was established. This shift led to a very important shift in the United States organ placements because the OCS enabled safe, longer distance procurement across the entire country and from outside the continental U.S., like Hawaii, Alaska, Puerto Rico, and Canada. So how do transplant programs coordinate their organ transport charter flights today? They rely exclusively on a few regional charter flight brokers who owns no jets or even have the license to operate a charter flight. Those charter flight brokers rely exclusively on the third-party owners and operators of charter flights. This is a very cost and operationally inefficient way of running organ transplant transportation and will become a major bottleneck for NOP growth going forward. This antiquated fragmented approach is not geared to the distances that we are now covering, the volume of donor organ missions that we do on daily basis using NOP, or the volume expected in the near and long-term future. Importantly, many of the jets used today are older vintage with very limited flight range and lacks Wi-Fi communication capabilities. We saw firsthand in 2022 the massive cost inefficiencies that exist in the current model, and we believe Transmedics managing our own logistical network will create value for our clinical users, their patients, and other critical stakeholders in organ transplantation in the United States. We believe strongly that securing this dedicated national network of charter flights under Transmedics Aviation would act as an additional significant catalyst for the growth of NOP and transmedics business in the United States. Again, I hope to share more details as we get this initiative operational later this year. There's no doubt our OCS technology and NOP service model are driving a transformative shift in organ transplantation in the United States. as demonstrated by our first quarter performance and strong growth trajectory thus far. It is important to note that we strongly believe that this is only the beginning. We are not stopping or slowing down. We have bigger goals in mind, and we fully intend to execute on our strategy to achieve sustained long-term growth for our business. We remain laser-focused. on execution and navigating this steep growth curve to drive continued success. As I've done in the past, I would like to share with you all what we see as the potential challenges that could temporarily impact our growth trajectory for the remainder of 2023. First, constraints on our supply chain and production capacity. As stated earlier, we need to be cognizant of our demand for raw materials as we increase production capacity. Though we do not currently foresee any issues, we could face some delays regarding some parts availability or obsolescence issues that could temporarily hamper our immediate term growth. Second, clinical NOP staffing delays could limit our ability to cover new regions hubs temporarily until we resolve it. Delays in securing our logistical network and air transport could temporarily slow us down later this year and into 2024. That said, given our strong 1Q23 results and increased confidence in the trajectory of our finished goods supply, balanced with potential scalability challenges above, We are increasing our annual revenue guidance for the full year 2023 to be between $160 to $170 million, up from our previously communicated guidance of $138 to $145 million. This new guidance represents 71 to 82% growth over full year 2022 total revenue. With that, let me turn the call to Stephen to cover the detailed financial results for the quarter. Stephen?
spk00: Thank you, Waleed. I will now provide some additional details on the Q1 results and other financial information for the quarter. For the first quarter of 2023, our total revenue was $41.6 million. This is an increase of 162% from the first quarter of 2022 and a 32% sequential increase from last quarter. In the U.S., revenue was $37.5 million, an increase of 177% from Q1 2022, and 29% sequentially from last quarter. The Oregon breakdown on U.S. revenue was $23.1 million of OCS liver, $13 million of OCS heart, and $1.4 million of lung. Ex-U.S. revenue was $4.1 million. a 75% increase from Q1 of 2022, and XUS revenue was made of $3.8 million of heart and $0.2 million of lung. Regarding the breakout of product and service revenue this quarter, as a reminder, the service revenue includes the added amounts we charge for the surgical procurement and organ management as part of the NOP. In Q1, product revenue was $34 million, and service revenue was $7.6 million. So service revenue was 18 percent of the total in Q1. Gross margin for the first quarter of 2023 was 69 percent. While this is down from 76 percent in the first quarter of 2022, it is a sequential increase from the 66 percent reported in Q4 of 2022. The margin on product revenue was 79 percent in Q1, and the margin on service revenue was 27 percent in Q1 2023. The sequential improvement in service margin reflected some of the improvements in production capacity and drove the higher overall sequential gross margin. Total operating expenses for the quarter were $30.9 million, 44% above Q1 2022 operating expense, driven primarily by our continued investment in scaling both the NOP as well as the overall company operations. Operating loss was $2.1 million in the first quarter of 2023 compared to $9.4 million in the first quarter of 2022, demonstrating the strong leverage in the business as we grow our revenue. Our net loss for the first quarter of 2023 was $2.6 million compared to $10.6 million in the first quarter of 2022. And our total cash was $195.4 million as of March 31, 2023, which equates to a reduction of 5.8 million from the balance at the end of Q4 2022. Our weighted average common shares outstanding for the quarter were 32.3 million. Overall, our financial results in Q1 2023 reflect our continued execution of the OCS and NOP growth plan. We have been able to unlock additional production capacity as planned, which was reflected in both our top and bottom line results. And just to repeat our guidance update, we are increasing annual revenue guidance to the range of $160 to $170 million, which represents 71% to 82% growth. Now, I would like to turn the call back to Waleed for closing comments.
spk02: Thank you so much, Stephen. We are thrilled by our 1Q results and continued growth of clinical demand for our OCS technology and the NOP clinical services. That said, as I said before, we strongly believe we're still in the early stage of the long-term sustained growth trajectory we envision for transmedics. We are not basking in our success. We understand that this steep growth curve could pose potential challenges. We remain focused, laser-focused, on driving our operational, commercial, and clinical initiatives while navigating any potential challenges to meet our near and long-term growth potential. We look forward to continuing to make strides on our strategic initiatives throughout 2023. With that, I will now turn the call to the operator for Q&A. Operator?
spk05: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Bill Plevanek with Canaccord. Please go ahead.
spk06: Hey, great. Thanks for taking my questions, and good evening. I'm going to start out with, and congratulations on the quarter. Just curious, how did capacity issues impact new account adoption? Like, are you constraining your sales folks from bringing on new accounts? And what's, you know, over this past quarter? And then what does the new clean room add in terms of net capacity, and how does that come online over the next few quarters, and then how does that impact gross margin?
spk02: Bill, thank you for the question. I'll address the first two parts of the question, and then I'll let Stephen address the impact on gross margins. So the ramping up of the capacity limited to a lesser extent in Q1 compared to Q3 and Q4 of last year, our ability to go deeper in some of the accounts. We tried not to limit new accounts addition in Q1. That's why you see the growth in the new accounts for heart and liver. but you notice that the repeat and active users remain slightly up or remain flat. It's because we wanted to get new accounts in, yet we wanted to supply our traditional users with the added capacity. That started in the beginning of Q1. At the end of Q1, this constraint pretty much dissolved based on the increased capacity. As far as the new clean room capacity, We expect at least, at least, and this is a guesstimate at this point because I believe the additional workflow optimization and efficiencies would even increase that substantially. We guesstimate approximately four times the capacity I would say over the next 18 to 24 months, because when we open that new clean room, it's not going to be fully staffed. It's not going to be double shift. It will take time, but it will add additional capacity gradually. That's why I said gradually, but definitely over the next 18 to 24 months, we expect a significant capacity increase. The key point to the audience or the people listening is we're not just stopping at the current. We are constantly looking at capacity. We do not want to get back to a situation where we were at in Q2, Q3, and Q4 of last year. So Nick and the team are constantly monitoring that, and we are going to be aggressive on making sure that we avoid a significant backorder situation from happening to us again. With that, I'll turn it on to Stephen to discuss the gross margin.
spk00: Hi, Bill. This is Stephen. Regarding gross margin, we were able to see a sequential increase. Primarily, that was around the service margin this quarter because We didn't have as much logistical costs of moving disposables quickly around the country to meet NOP needs. So we're able to kind of reduce that some. At the same time, we do have additional costs from the new clean room that's already kind of baked into our margin. So, you know, as I've said in the past, I expect moderate increase in margin as our revenue grows, you know, sequentially, and I still feel like that's the right answer.
spk06: Great. And for my second question, just on the aviation, you talked about the potential expansion, and thanks for going through that in detail. You know, A, what's the most likely pathway to business and the cost to do so to get into it? Is this an acquisition or is this building it kind of plane by plane? And then, B, do you think you'll need to raise capital or equity or debt or some form to do what you're looking to do? And then, C, How does this impact the P&L, revenue gross margin operating? And thanks for taking my question.
spk02: Thank you, Bill. Again, I'll address the first two parts of your question, and let Stephen address the impact on the P&L. We evaluated all different options of how to build the transmedics aviation business in transmedics. We've completely eliminated the organic option of adding one plane at a time because it will take significantly long time for Transmedics to secure a Part 135 charter operating license. It's going to take at least 12 to 18 months. So our two most efficient paths are either acquiring a Part 135 operator that has significant assets of jets that we can leverage quickly, or creating a joint venture with one operator that had, again, a license and a significant number of assets. These are the two options that we are actively pursuing across the United States. As far as the ability to finance this, we've always stated publicly that we do not expect to tap into our current balance sheet to finance anything related to the aviation business. So we're exploring different modalities of financing that is non-dilutive or less dilutive forms of financing options in front of us. And we're working with our advisors on the different options. I'll turn it on to Stephen.
spk00: Yeah, Bill, from a P&L perspective, so today the revenue for flights is not in our P&L, so we would think of that as an adder from a revenue perspective for each transplant, whether it's a, you know, $20,000 or 30,000 depends on the length of the flight. So that would be one change. So more of our revenue would be on the service bucket. Although we think the service revenue, the service margin would be improved. The overall company gross margin percent may come down a bit. But from a dollar perspective, it should be a, you know, an accretive to our, income. And, you know, once we're in positive EPS, it would be favorable to EPS.
spk06: Great. Thanks for taking my questions.
spk00: Thank you, Bill.
spk05: The next question is from Alan Gong with JP Morgan. Please go ahead.
spk03: Hi, thanks for taking the question. Congratulations on the really strong quarter. You know, we, there's obviously a lot of really exciting things to talk about when it comes to HART. and liver, but I do want to like kind of touch on the lung a little bit. You know, it's clearly continuing to face pretty significant challenges, even as the rest of your portfolio is taking off. You know, I understand that lung really was impacted quite a bit by COVID and has not really come back necessarily in the same way for you, even as transplants have recovered. So, uh, what kind of details can you provide on your strategy to really get that market, you know, back up and running for OCS?
spk02: Thank you, Alan, for the question. I think, um, I think I'll focus on what I stated publicly before, and hopefully as the year progresses, we will be able to reveal some more granular detail about our initiative. So basically what we're doing is literally we are trying to leverage three things. We're trying to leverage the NOP and the success of the NOP in liver and heart to rev up the lung market. So that's one angle, and we discussed that in detail at the ISHLT. The second angle is we're trying to re-educate the market, market in general, including patients' group, about the importance of OCS lung and what does it mean to a patient on the waiting list waiting for a lung transplant, and Also the market in the form of the pulmonologist and the transplant surgeons. Because I believe the last three years with COVID, people just kind of lost focus on even understanding what the importance of machine perfusion for lung would be. So that's another area. The third area is where we, and this is the area that I'm going to be as vague as I can. And hopefully as the year progresses, we will provide more granularity around it. We're trying to find the right mix of catalysts to kind of quickly galvanize a major clinical focus on machine perfusion for lung using our platform, our NLP. I'll leave it at that, Alan, but I promise you that hopefully within the next quarter or two, we will discuss in detail. Again, I am not concerned about the trend we saw in Q1. We're watching what's happening in Q2, and we feel that the early initiatives are starting to bear fruit, but we're not stopping here. We're going to continue to push forward with all three prongs as we move forward, and we will explore other modalities as well. So this is an important market for us, and we're not going to give it up that easily.
spk03: Thanks. And then another question with a bit of a more positive slant. When I look at, you know, your updated guidance, it looks like a really impressive, you know, beat and raise quarter. But when I look at what you've kind of left for yourself in 2Q, 3Q, 4Q, you're basically implying flat revenues, right, on a quarterly basis. Now, I'm not saying the cadence will exactly be like that. But, you know, what's really holding you back from meaningfully outperforming that once you have capacity up and running at the end of 2Q? you know, like why shouldn't you be able to really outperform this bar you set for yourself? Thank you.
spk02: Thank you, Alan. Excellent question. So, Alan, we were trying in the script, we were trying to identify a nuance that is taking place as we ramp up production capacity, which has been our Achilles heel for the last three quarters. Now we're straining our ability to secure raw material at the same pace or at the same volume as we historically have kept in inventory. So we had to be conservative and prudent to make sure that we allow Nick and the team to have enough buffer of raw material. They don't know what's coming around the corner. We're ramping up our purchasing of every raw material we use for the build of all of our products, solutions. So we had to leave some room to allow for some surprises to take place. And also, as you know, we are conservative by nature and we like to be realistic. You know, we know what the, you know, I think in MedTech, having 70 to 80% growth is not an easy thing to do. And we think this is very realistic and we hope to do better. But right now, I cannot, we have to be prudent that the team is working very hard to make sure that we don't run out of raw materials. The other area, as I stated on the call, you know, the other area is making sure that we're ramping up our staffing and also ramping up our control of our logistical network, specifically aviation. If we get all these three done, Alan, you know, this is really when I feel confident that – you know, going forward in our long-term growth trajectory. But this is a year that we're still building. We're still building our supply infrastructure, our NOP infrastructure, where we're upgrading and scaling our logistics. We're adding a whole new business unit in Transmedics called Transmedics Aviation. So we have to be prudent, we have to be realistic, and we feel pretty strongly and pretty confident excited about the opportunity here and the potential in front of us. And we feel that the guidance we outline reflect reality from where we see it.
spk05: The next question is from Cecilia Furlong with Morgan Stanley. Please go ahead.
spk07: Good afternoon. Thanks for taking the questions and congrats on another strong quarter. I wanted to start, Waleed, some of your comments in the Q&A, just about the center targeting balance that you talked about in one queue as you worked through some of the supply. And as you think going forward, just as capacity increases, can you talk about how you're thinking about the focus on bringing on new or the earlier stage NLP users versus really circling on and driving deeper utilization across your current repeat users? And then also, as we think about 23-2, what are you contemplating the balance from a commercial standpoint on trying to reinvigorate lung versus driving those heart as well as liver sites going forward?
spk02: Thank you, Cecilia, for the question. I think my answer for both questions will be the same, Cecilia. We've always said from the day we went public, we've said Transmedics is not a single organ company. We're not a single trick pony. Transmedics full potential happens when we have all three organs firing in all cylinders. Also, as we gained FDA approval of heart and liver, we also stated publicly that that kind of make the business more resilient to any headwinds in one organ, i.e. the lung delays. So from our perspective, we are going to continue to push on all three fronts to achieve our overall growth for the business, regardless where it's coming from. So that's number one, or the second half of your question. The first half of your question is, Again, we stated this last quarter that our growth strategy is not a single focus point. We're focusing on going deeper in our existing accounts or existing centers, but also growing the number of users in the United States. um and um and and that's something we're going to continue to pursue that's why at some point hopefully in the future at some point the number of centers is really going to be moved to us it's really as long as we're demonstrating growth grow and and and the third element to the strategy is growing the overall u.s transplant volume so one can argue If we just stay with one core group of centers and we were able to penetrate their existing volume deeper and grow their overall volume by 30 or 40%, that could achieve significant success growth-wise for transmedics. But that's not what we're doing. we're doing all of the above what we're targeting existing centers to grow their penetration and overall volume we're targeting new centers to hook them up on nop and its benefits for them and for their patients and for their staff and going deeper and growing their overall volume so that's what we'll be doing over the next few years and that we believe that if we achieve that Coherent strategy, that is the recipe for a huge growth and success for transmedics. And in our humble view, makes transmedics more resilient to any of these headwinds that we could experience throughout this growth potential.
spk07: Great, super helpful. And if I could follow up as well, just on margins, and specifically the service margin component of gross margin that we saw pick up. Steven, if you could talk through how we should think about just that component of gross margin to the balance of the year. And then secondly, on OPEX as well, as we think specifically SG&A, some of the initiatives you talked about in terms of building out, adding incremental components to NLP, just how we should think about the balance of this year from an OPEX and SG&A standpoint. And thank you for taking the questions.
spk00: Thanks, Cecilia. So first on the service margin, we were able to see, as I mentioned, an increase in Q1 from this kind of challenging situation we were in Q4. So I think we should see that stay. So we should be kind of at that level. I don't expect a big increase in that level that we were in Q1, but we should remain there as long as we don't fall into another device or disposable shortage situation. So that will help as our revenue grows and help our overall margin for the company. As far as OpEx, I mean, we grow OPEX about 44%. I think I mentioned the last call kind of growth overall annually in the 30%, 35% range. That includes a lot of these initiatives. So I think that gives a sense of, you know, how we're investing.
spk07: Great. Thank you.
spk05: The next question is from Siraj Khalia with Oppenheimer. Please go ahead.
spk01: Good afternoon, Wally. It's Stephen Tamer. Can you hear me all right?
spk02: Yes, perfect, Suresh.
spk01: Perfect. Gentlemen, congrats on another nice quarter. So, Waleed, I was asked a question by a client, and suffice it to say it threw me for a loop. Maybe you can help clarify. So the question was, should transmedics have waited to get into the logistics, i.e. transmedics aviation, till a critical mass of organs are under their belts? I believe you all gave a number of 535 done until sometime in April. Would it have made more sense to reach 1,000, 2,000? Any additional color there would be great.
spk02: Sure. Suraj, thank you for the question. We, of course, we would have never entertained this thought if we do not believe that not only we've achieved a critical mass, that what we see coming will literally, could literally put the entire logistics into a screeching halt. So we feel very confident that we have enough critical mass today, but more importantly, we're very concerned that our volume by year end is going to literally be at a much higher scale that could actually start becoming a bottleneck finding airplanes. We're having problems finding airplanes for our missions today, not at the end of the year. And we know our volume is going to be significantly higher by year end and definitely into 2024. It makes perfect sense. The question makes sense, and we want to reiterate that we believe we have reached a critical mass today, and what we see coming would even behoove us to act quickly and decisively before it becomes another area that we are talking about on these calls.
spk01: Fair enough. Waleed, one for you, one for Stephen, and I'll hop back in queue. So, Waleed, It's been a little over a year with the heart approvals. Whether it's heart, whether it's livers, how should we think about the pie? Are you all taking away share from cold storage, or do you think the overall pie is increasing? Wally, that's for you. And, Stephen, for you, if I may, so when transmedics aviation, we look at it, would it be a separate, quote-unquote, subsidiary? So the P&L would be different, or would everything be under the transmedics umbrella, you know, traditional reporting, so to speak, and OPEX and so on and so forth? And, Stephen, would I be too far off in saying all said and done in two years, including 25 surgeons per organ, let's say 16 planes, obviously the form, but, you know, we are talking about an incremental expense, somewhere $50, $70 million per year? Gentlemen, thank you for taking my questions, and congrats again.
spk02: Thank you, Suraj. So let me address the first question. The answer is both. We're taking a significant portion of the existing market and we're growing the overall market. And again, the numbers speak for themselves. We've seen heart grew by 9% last year, lung grew by 7%, liver grew by 3%. We expect the overall growth of these organs to be higher in 2022. I'm sorry, 2023. And we're taking a meaningful percentage of their current volume. Why? Because we're streamlining the process through the NOP. And this is what I said earlier to Cecilia's question. Our strategy is not just to cannibalize the existing market. Our strategy is to do that plus grow the overall market And I think our, I believe that our results speak for themselves. We have demonstrated our ability to do both in our 2022 results. And we are continuing to see that trajectory in 23. And we expect that to continue going forward.
spk00: And Siraj, let me address the question on the subsidiary. I don't expect it to be a separate subsidiary reporting separately. I expect it to be part of our overall P&L. And when it comes to, well, I can't really talk about the investment at this moment. You know, what I can say is it will include a revenue component, you know, added revenue as well as cost. So it's not going to be a break-even. It will be, you know, added, you know, bottom line to transmedics as well. I hope that makes sense.
spk05: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Walid Hossein for any closing remarks.
spk02: Thank you. We thank you all for your time this evening, and we look forward to having our next call for Q2 results. Have a wonderful evening.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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