TransMedics Group, Inc.

Good afternoon and welcome to the TransMedics fourth quarter and full year 2024 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. To ask a question at that time, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Lane Morgan from the Gilmorton Group for a few introductory comments. You may begin.

Thanks, operator. Earlier today, Transmedics released financial results for the quarter and full year ended December 31st, 2024. 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 meanings 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, services, and timing of new clinical programs, 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 2025 and beyond 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. Additional information regarding these risks and uncertainties appears under the heading risk factors of our form 10Q followed with the Securities and Exchange Commission on October 29th, 2024. Our subsequent SEC filings and the forward-looking statements including today's earnings press release, which are available at www.sec.gov and 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 it's a live broadcast today, February 27th, 2025. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you, Lane. Good afternoon, everyone, and welcome to Transmedic's fourth quarter and full year 2024 earnings call. Joining me today is Gerardo Hernandez, our Chief Financial Officer. Before reviewing our financial and operational results, I would first like to make a few remarks about our mission and our unique market position. Our mission at Transmedics has always been and remains to expand the utilization of available donor organs for transplantation, while delivering the best possible clinical outcomes for our transplant patients. It is indisputable that Transmedics has been successful in meeting these goals. Today, Transmedics is radically transforming the field of organ transplantation globally and has already played an integral part in saving thousands of lives. Enabled by our disruptive OCS technology, comprehensive NOP clinical services, and our rapidly growing transplant logistics infrastructure, we are doing things today that few thought possible in organ transplant field. We hold ourselves to the highest professional ethical and moral standards in everything we do. We are extremely proud of our highly diverse and dedicated team of professionals, all of whom are committed to saving the lives of patients in need of an organ transplant in the US and around the world. Despite our efforts, Transmedics was targeted in a recent short report that raised serious allegations about the company and leadership. We took this matter very seriously and retained outside counsel at Kirkland Ellis LLP to conduct a thorough investigation of the allegations in the short report. In addition, Kirkland engaged an experienced outside forensic accounting firm to support their work, which has been reported to the audit committee of the board of directors. This investigation did not find any evidence of fraud or other misconduct. Allow me to repeat this again. This investigation did not find any evidence of fraud or other misconduct. In addition, we engaged our senior FDA regulatory counsel from Covington and Burling LLP to respond to the citizen petition, which was previously submitted by the short seller to FDA. Both our response and Covington's legal response to the citizen's petition were published in the FDA website last week. To summarize, We strongly believe that this short report is nothing more than a collection of baseless and racist allegations and a smear campaign made for purely financial gains. Unfortunately, this was at the expense of transmedics, the clinical transplant community, and most importantly, the lives of the patients whom we serve. We stand firmly by our business. and our dedicated world-class NOP surgical and clinical leadership and team. They are the unsung warriors who are out there in the middle of the night ensuring that every suitable donor organ is evaluated and potentially preserved on OCS for possible transplantation to save a patient's life. Importantly, They are working tirelessly to manage these organs on OCS in a manner that enables the highest quality clinical care and outcomes for our patients. We are extremely humbled. We're extremely humbled by and proud of the significant life-saving impact of our OCS technology and NOP teams. We remain committed to our mission of expanding access and improving clinical outcomes to patients in need for organ transplants. Now let me proceed with discussing our business performance. On our last call, we discussed several headwinds that impacted 3Q results and why we viewed these generally as transients. Today, we're thrilled to report 4Q results that validate our views. 4Q24 was a banner quarter for our business and allowed us to conclude 24 on a very high note. Here are the key operational highlights for Q4. Total revenue for 4Q24 was $121.6 million, representing approximately 50% growth year over year and 12% sequential growth from 3Q24. U.S. revenue grew 11% sequentially to $117 million, while OUS revenue grew approximately 51% sequentially to $4 million. Transmedics Tristite Logistics service revenue for 4Q was $21.7 million, up from $9.2 million in 4Q23 and up from $20.1 million in 3Q, representing approximately 8% sequential growth. Our overall gross margin for 4Q improved to 59%, up from 56% in 3Q24. Finally, we delivered an operating profit of 8.6 million in 4Q, representing approximately 7.1% of total revenue and up from 3.9 million or 4% of total revenue in 3Q24. Now let me provide the financial metrics for the full year 2024. Total revenue for full year 2024 was 441.5 million. representing approximately 83% growth over full year 2023 revenue. Our U.S. revenue grew to $422 million, representing approximately 91% growth over the full year 2023. Our OUS revenue was $15 million, relatively flat year over year. Our overall gross margin for the full year 24 was 59.4%, down from 63.8% in 23. This is due to the higher contribution of service revenue and in line with our stated expectations. Importantly, we delivered an operating profit of 37.5 million, representing approximately 8.5% of total revenue for the full year 2024. We're very pleased by our strong performance in 4Q and full year 24, which was fueled by our ability to grow our case volume and drive further market penetration. Importantly, our performance enabled growth in overall US liver and heart transplant volumes for the second consecutive year, driven primarily by OCS NOP cases. Our performance has also demonstrated our ability to return to our normal cadence of growing market share despite the ebbs and flows of monthly and quarterly variability in transplant market dynamics. Here are the key highlights of our annual case volume and market share per organ. For the third consecutive year, we grew OCS transplant case volume. There were 3,715 U.S. OCS cases for the full year 24, up from 2347 U.S. cases in 2023. Our overall OCS U.S. market share across all three organs was 20.9% for the full year 24, up from 13.8% in 2023. For the second year in a row, we saw growth in overall U.S. adult liver, heart, and lung transplant volume, For the full year of 24, there were 17,792 liver, heart, and lung transplants, up from 16,580 in 2023. We strongly believe that the OCS NOP once again played a key role in driving liver and heart overall market growth due to the increased use of DCD and DBD donors in the U.S. On an organ by organ basis, overall US liver transplant volume grew 9% over 23 to 10,393. US heart transplant volume grew by 1% over 23 to reach 4,085 transplants. Since 2022, the US adult liver transplant market grew at 11% CAGR, while adult heart transplant market grew at approximately 6% CAGR. Again, we believe the OCS NLP played a key role in driving this growth by utilizing more DCD and DBD donors in the U.S. Now, let me discuss our annual market share per organ. For liver, we grew our overall U.S. market share to 27% of liver transplants, This is up meaningfully from 17% in 2023. We saw growth in market share of both DBD and DCD segments. For DBD, we grew 17% up from nine in 2023. And for DCD, we grew to 53% up from 50% in 2023. For heart, we grew our overall market share to 19% of all heart transplants in the US, up from 16% in 2023. We maintained our dominant position with DCD hearts, enabling 66% of all DCD heart transplants, while 8% of DBD hearts in 2024 were done using OCS. For lung, we maintained a modest 4% market share of all U.S. adult lung transplants. These adoption metrics underscore the significant remaining greenfield growth opportunity for OCS NOP. In particular, we see an opportunity to drive deeper adoption across both DPD and DCD segments for liver. The next-gen heart clinical program will focus primarily on driving deeper adoption for DPD and continuing to grow share in DCD. Finally, our next-gen lung clinical program will focus on reinvigorating the OCS lung market in the U.S. As we've discussed, both programs are targeted to launch in H2 2025. Now let me shift gears and provide an update on our transmedics, transplant logistics infrastructure and 4Q performance. Through 4Q, we continue to expand our fleet of owned aircraft, reaching 19 by end of 4Q. As of today, we own 21 aircrafts. We are planning to add one more aircraft in 25 Our goal is to average these 22 aircrafts for the remainder of the year to optimize utilization and maximize the efficiency of our operating model with existing assets. We will continue to hire pilots, however, so we can double shift a portion of our fleet to assess the impact on the efficiency of the operation. Our daily average aircraft availability in 4Q was 14, up from 10.7 aircraft on average in 3Q. This enabled us to service the majority of our NOP missions using Transmedics-owned aircraft. Overall, our owned aircraft covered 75% of our NOP flight missions in 4Q compared to 61% in 3Q24. Moving now to provide a quick status update on our next-gen OCS heart and lung clinical programs. Last week, we filed our OCS lung IDE for our new clinical program, and we expected to file our OCS heart IDE for our new clinical program within the next few weeks. Detailed preclinical results, as well as the proposed clinical program design and endpoints, will be formally and publicly presented at the upcoming ISHLT Scientific Conference in April here in Boston. We are bullish about our clinical and product pipeline and the potentially transformative nature of these new clinical programs to catalyze the near, mid, and long-term growth of our OCS platform. These programs will also be critical in further expanding overall lung and heart transplant volumes nationally while enabling deeper adoption into DBD and DCD market segments. Now let me discuss our 2025 expectations and guidance. As we stated at our Investor and Analyst Day in December 24, we believe that 2025 will represent another transformative year for transmedics, particularly as we launch the next-gen heart and lung programs to catalyze growth in these important market segments. In addition, we will also continue to build on our strong liver foundation, expanding our DBD and DCD liver adoption based on our excellent clinical outcomes in both of these segments. We are also investing heavily in our next-gen OCS technology platform that will help us in future years go beyond our stated goal of 10,000 US NOP transplants in 2028. Finally, we are planning to continue to strategically invest in our business infrastructure to ensure scalability while maintaining quality and reducing supply chain risks. We're looking forward to discussing progress on these initiatives throughout the year. As we plan for the year ahead, we're also cognizant of a few operational challenges that we would like to share and highlight. First, As stated, we are still building out our logistics infrastructure to optimize efficiency of operation. As such, unexpected aircraft maintenance may impact availability and create variability in our service margins. Second, we should expect that as we continue to gain market share throughout the year, we may be impacted by the normal ebbs and flows of organ transplantation volume in the US, as we saw in 3Q 2024. Finally, the precise timing of launching the NextGen lung and heart clinical programs will depend on several variables, especially FDA ID approval timeline, center IRB approval, and center initiation process, et cetera. We will continue to report on these important milestones as they materialize. Based on the above, We are setting revenue guidance for the full year 2025 to be between 530 and 552 million, representing a 20 to 25% growth over full year 2024. With that, let me turn the call to Gerardo to cover the detailed financial results of the quarter.

Thank you, Walid. Good afternoon, everyone, and thank you for joining us today. I am pleased to be here to discuss Transmedic's strong fourth quarter and full year 2024 results. As we close the year, we continue to build momentum across our business, demonstrating disciplined execution, positive impact of our strategic investments, and significant revenue growth. Our progress through the fourth quarter reflects the increased OCS adoption, the ongoing expansion of our logistics infrastructure, and an overall improved financial performance. Turning to our financial results. In Q4 of 2024, we delivered a total revenue of 121.6 million, representing a 49.8% year-over-year growth and 11.8% sequential growth from Q3. This performance underscores our ability to execute our strategy while managing through a dynamic operating environment. Breaking down our revenues, product revenue increased to 74.9 million. reflecting a 44.5% year-over-year growth and 13.8% sequentially. Growth was primarily driven by continued OCS adoption, mainly in liver and heart. Service revenue, which includes revenue for more clinical and organ procurement services, logistic operations, and fly school, reached 46.7 million, growing 59.3% year-over-year and 8.8% sequentially. Growth was primarily driven by the positive impact of our fleet expansion and fleet utilization. International revenue remained a modest portion of our total business at $3.9 million, which represents 11% year-on-year increase and 50.7% sequential increase. The revenue split by organ in the fourth quarter for international revenue was $3.4 million for hard, $0.3 million for long, and 0.2 million for liver. Our gross margin for the quarter was 59.2%, which reflects a slight improvement over the 59% gross margin in the fourth quarter of 2023. U4 gross profit included approximately 2 million in inventory-related charges associated with our year-end inventory procedures, which negatively impacted the fourth quarter's gross margin by approximately 164 basis points. As we continue strengthening our internal inventory controls, we do not anticipate similar impacts moving forward. Sequentially, gross margin improved from 55.9% in Q3 of 2024 to 59.2% in Q4, primarily driven by a recovery in service margin. Compared to Q3, product gross margin declined 200 basis points, reflecting the impact of the inventory-related charges. However, on a year-over-year basis, product gross margin expanded 500 basis points from 72.9% in Q4 of 2023 to 77.9% in Q4 of 2024, primarily driven by scale efficiencies and favorable cost variances. Service margin improved from 19.2% in Q3 to 29.2% in Q4 of 2024. as the non-recurrent costs that impacted Q3 were no longer a factor. Additionally, reduced reliance on third-party logistic partners contributed to margin recovery. On a year-over-year basis, survey gross margin declined 537 basis points from 34.5% in Q4 of 2023 to 29.2% in Q4 of 2024. reflecting a higher proportion of logistic revenue in the overall mix. Total operating expenses for the quarter were $63.4 million, up 39.8% year-over-year and 11.3% sequentially. R&D increased 53% year-over-year and 50.4% sequentially, reflecting continuing investment in both near-term OCS innovation and longer-term development of next-generation OCS technology. SG&A expenses grew 35.7% year-over-year and 10% sequentially, primarily driven by strategic investment to continue to support clinical adoption and strengthening our NOP capabilities. We are confident that our investment in the NOP and logistics infrastructure will continue to enhance our operational efficiencies and drive long-term scalability and profitability. Operating income for the quarter was 8.6 million with net profit of 6.9 million. This compares to a 2.6 million in operating income and 4 million net profit in the fourth quarter of 2023, reflecting a strong year-over-year improvement driven by revenue growth and continued operating leverage. Total cash at the end of the quarter was $336.7 million, a decrease of $58.2 million from December 31st of 2023. In 2024, we invested approximately $112 million in the purchase of eight aircrafts, reinforcing our commitment to scaling our aviation and logistic capabilities. 2024 marked our first year of positive cash from operating activities as we generated $48.8 million compared to 13 million outflow in 2023. This is a significant step towards sustained financial strength. Now let me summarize our full year 2024 financial results. Full year revenue reached 441.5 million, representing an 82.7% growth over 2023. Growth was led by lever revenue, which grew 103.4%, while hard and long also delivered strong growth at 50.3 and 49.6% respectively. U.S. transplant revenue reached $421.9 million, reflecting a 90.6 year-over-year growth. Our international transplant revenue ended the year at $15.3 million, representing a 1% decline compared to 2023, and the unreflecting limited reimbursement, which makes revenue from these markets inherently variable. Flight school revenue for the year was $4.4 million. Breaking it down by category, product revenue reached $273.9 million, while service revenue contributed with $167.7 million. Breaking it down by organ, liver revenue reached $309.6 million, heart revenue reached $109.9 million, and lung reached $17.7 million. Gross margin for the full year was 59.4%, down for 63.8% in 2023, primarily due to the increasing share of service revenue, which carries a lower gross margin. Total operating expenses were $224.6 million, up 22.8% year-over-year. primarily driven by continuing investment in OCS platform expansion of NOP infrastructure and scaling of aviation capabilities to support business growth. It's important to note that 2023 operating expenses included a $27.2 million of acquired in-process R&D expenses related to the Bridge to Life acquisition. Excluding this one-time impact, operating expenses growth was at 44.3%, reflecting our strategic focus on supporting long-term growth initiatives and expanding operational capacity. 2024 was a milestone year as we achieved operating profitability for the first time, generating $37.5 million in operating profit compared to $28.7 million loss in 2023. Net profit for the year was $35.5 million compared to $25 million loss in 2023. This performance reflects our ability to scale efficiently while driving meaningful financial improvements and positioning us for sustained momentum in 2025. Earnings per share was $1.07 and diluted earnings per share was $1.01. On a full year basis, the basic and diluted weighted average common shares outstanding were 33,229,953, and 35,216,837, respectively. Now, turning to our total revenue guidance for 2025. We anticipate a 20 to 25 total revenue growth over the full year of 2024, which translates on a year revenue range of 530 million to 552 million. Growth will continue to be driven primarily by increased OCS adoption and service revenue. As Walid mentioned, we expect some level of quarter-to-quarter variability, reflecting the dynamic nature of organ transplantation. However, we believe that that variability tends to normalize in subsequent quarters. In 2025, we anticipate continued gross margin improvement across both product and services. driven by scale efficiencies and operational improvement. However, the increasing proportion of service revenue, which operates at a lower margin, will moderate the overall margin expansion. As such, we expect a relatively modest gross margin expansion in 2025 compared to the full year of 2024. Overall, we also anticipate modest operating leverage gains at total operating expense level. While we continue making targeted investments in growth and innovation, we remain focused on balancing strategic expansion with financial discipline to drive sustainable profitability. With that, I'll turn the call over to Walid for closing remarks.

Thank you, Gerardo. Overall, we're very proud of our 24 results as we delivered 83% year-over-year growth. achieve positive cash flow from operating activities while investing in our pipeline and continuing to build our infrastructure to capitalize on our highly differentiated technology and service offering. We now look forward to continuing to execute across several strategic initiatives throughout 2025. In conclusion, We are humbled and proud of the significant lifesaving impact of our OCS technology, NOP service, and dedicated team, and remain committed to our mission of expanding access and improving clinical outcomes to patients in need of organ transplants around the world. With that, I will now turn the call to the operator for Q&A. Operator?

Thank you. We will now begin the question and answer session. As a reminder, 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. If you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Alan Gong with JP Morgan. Please proceed.

Hi team, thanks for the question and congratulations on a solid close to the year. I guess just for my first question, you know, Gerardo, you touched upon kind of seasonality and how you expect to see, you know, some quarter to quarter variability. I understand it might be hard given, you know, kind of the nature of the market to kind of predict that. But how should we be thinking about the quarter to quarter cadence implied in your guide? Should we be thinking about third quarter as being, you know, another soft quarter like this year? Just some help there.

Hi, Alan. Thank you for the question. It's Walid. Let me start, and I'll pass it on to Gerardo for additional color. As you know, Alan, we don't issue quarter-to-quarter guidance or quarterly guidance. You know, the variability in the transplant market, we usually see it, you know, in any quarter. We want it to be proactive and remind the market of what we saw in 2023, but we are not identifying or highlighting a specific quarter. Generally speaking, the two quarters, we've experienced some of the volatility before. Generally speaking, with Q3 and Q4, giving the summer holidays and the Christmas holidays. However, sometimes we see that variability in other quarters as well. I'll pass it on to Gerardo.

I think just, Alan, thank you for the question. The only point that I will add is just bear in mind that we absolutely believe that variability tend to normalize in subsequent quarters. So just keep that in mind when we go through the year.

Got it. And then just to follow kind of on the organ-specific growth, right? You know, this was a really strong close to the year for both heart and liver. When we think about the growth trajectories through 2025, should we essentially assume that kind of, you know, the mix of growth should look similar this year with liver still driving the majority of the growth, at least until maybe you start getting some heart clinical trial revenues in the back half. Just kind of curious about that.

Thank you. Thank you for the question, Alan. Yes, I think it's safe to assume that liver will continue to lead our growth until we see contribution from both the heart and lung clinical programs, which will hit in the second half of the year. So I hope that we see stronger signs as the programs become more active and broadly utilized in the US. So I'm looking forward to reporting on that by hopefully by year end in 25 and into early 2026.

And our next question comes Yep. And our next question comes from Josh Jennings with TD Cowan. Please proceed.

Hi, good afternoon. It's great to see a strong finish to the year. Well, there have been some concerns about the potential attrition of high volume customers. Clearly, that was not in play in the fourth quarter. I was hoping you could just comment on your confidence level that high volume customers are going to be just that in 2025, or are you seeing any change in your customer base or evolution outside of adding new customers?

Thank you, Josh, for the question. I think that concern is not a broad concern. I think that concern came from the confabulation that we saw in the short report. We have not seen that dynamic. The results speak for themselves. In fact, I will go out and highlight or underscore some important information. The four centers that were cited in the short report are active users of the OCS in Q4, were active users in Q4, and they're active users in Q1. And I'll leave it at that.

Appreciate it. And I wanted to just ask about share gains from over another – bucket of concern is just on competitive risk of the NRP approach. Again, fourth quarter, OCS, the whole offering took share by RMAP. But can you just talk about any trends that you're seeing in the fourth quarter in the DCD, the liver and heart segments with NRP and then how they're trending in 1Q25 so far? Thanks a lot.

I think the only market where NRP could imply taking share from us is in the liver. We're seeing actually an overall growth in the DCD liver penetration for OCS. And again, NRP is not a mutually exclusive of OCS. We do NOP liver cases post-NRP. NRP is nothing but a surgical procedure to try to convert a DCD donor to a DBD donor, but it's not as simple as that. You still need to preserve the liver. You still need to assess the liver. You still need to protect the liver. So again, as I stated before, we do not see NRP as a threat to our liver DCD franchise. And based on the data, we've actually seen market share increase in the year to 53%. Thanks so much.

And our next question comes from Bill Plevanek with Canaccord.

Please proceed. Yeah, great. Thanks for taking my questions and good evening. So quick just First question is, thoughts on the New York Times article today on the organ allocation and the line jumping? And then investors are asking, what role, if any, do transmedics play in that allocation process? What's your exposure to the skipper sites? And is this something, if they get their hands slapped or something happens, that there's an impact to your revenue? That's my first question.

Thank you. Thank you, Bill. You know, in one aspect, we're encouraged that there is public awareness now, more and more public awareness about the challenges of organ transplant. However, some of these positions are missing the full picture and need additional education. As you called it, not us calling it, you know, national allocation or broader allocation or what you called it as line jumping doesn't happen for, you know, in everyday cases unless centers decline the organ. So, in fact, if we want to see improvement in utilization of donor organs and overall growth, this has to happen because if centers keep declining the organ, historically, these organs would go by the wayside and we never utilize them. So there is a missing element to the New York Times article today that came out today that is just a piece of information and education. And, you know, as we've stated publicly, we are going to play a more active role in continuing to educate the public community about the challenges of organ transplant. And, you know, we're encouraged that there are more and more public interest in organ transplantation. Okay. We do not see that article or the issue that that article highlight impacting our business meaningfully, Bill, to be clear.

Okay. And then just on the first quarter, you know, the UNOS weekly transplant data is improving both year over year and quarter over quarter, you know, month to date through the seven-week data. Just any thoughts on maybe why we're seeing that improvement and how does that impact you?

So, Bill, again, this is the variability that we've been talking about for three-plus years since we got FDA approval across all three organs. This happens in organ transplants every year. There's a variability quarter to quarter, month over month. That's why we only report our overall volume and penetration data in that level of granularity at year end, so when everything is settled. How does it impact our business? Of course, when the numbers are up, we should be up as well. But I think we also learned, based on the results from second half of last year, that our performance relies on many variables, one of which is the national volume, the other is the NOP volume and our ability to penetrate in the different market segments. And we plan to continue to do both of the above. So it's a great sign. It's important to see transplant volumes recovering. you know, we were hoping to see that because, as you know, Q4, the overall national volume was kind of flattish or a little bit down. So it makes sense, as Gerardo said, our expectation is we always see when one or two quarters are flat or down, it normalizes afterwards. So this is a welcomed transition.

Yeah, and then just on the guide, just any Any commentary on Q1? I mean, typical seasonal up is expected. And then you mentioned on the guide, just with the benefit of having the heart and lung programs, how much of that are you, you know, of the 20, 25% growth, how much is the back half heart and lung a contributor there? And thanks for taking my questions in good quarter.

Thank you, Bill. Thank you. Our guidance assumes the different variability quarter to quarter, as well as variability in the start of the clinical trial. As far as, you know, how much of the clinical trial we're anticipating in this year, you know, miniscule. I would estimate it to be between 2% to 5% maximum. So the guide contemplates all these variabilities, both at the national level and the initiation of the trial timeline.

Two to five percent of growth or two to five percent of total revenues?

The growth.

Okay, so without that, it would be 20 to 23 percent, and the programs are taking it up to 25 percent. I just want to be clear on what that contribution you're saying is.

I would say, roughly speaking, Bill, it's not a guidance, and we said a range of 2% to 5%. Okay, thanks.

Our next question comes from Suraj Khalia with Oppenheimer. Please proceed.

Waleed, Gerardo, congrats on a strong finish to the year. Can you hear me all right? We can hear you just fine. Perfect. So Waleed, your independent review done by Kirkland and Ellis, what was the scope of the review? Help us understand the independence of this review because it was concluded in six weeks, and will this be made public?

Thank you, Suraj. We do not comment on any of our internal or board-initiated dynamic. It is a full independent review. It was reported to the audit committee, and it was a pretty exhaustive review, and I would leave it at that.

Got it. Waleed, I just want to piggyback on Josh's earlier question. Obviously, your FY25 guide is strong, right? The math is implying roughly around 5,000 organs. Part of the noise right now, Waleed, the concern is that it would dampen enthusiasm at new sites. But you guys are telegraphing share gains. I think so in your comments you mentioned share gains and the confidence thereof. Help us understand, Waleed, okay, in the rearview mirror, Q4 has gone great. Kudos to everyone. But obviously you guys have to be seeing something ahead in terms of share gains that gives you the confidence to put this guide out. Help us, especially given all the noise, help us understand What is giving you the confidence for continued share gains? Gentlemen, thank you and congrats again.

Suraj, thank you so much for the thoughtful question. Suraj, I want to be crystal clear. Noise does not drive transmedics, does not drive our planning, does not drive our business, period, full stop. Two, we reported significant share gain in 24 over 23. Yet, we reported single digit penetration in DBD segments for liver and heart. We reported 53% penetration in DCD liver. There's a lot ahead of us. There's a big green field opportunity for growth ahead of us. We have not, even though the noise claim or allege that we are losing market share or losing major users. We're not seeing any of this. And again, we are bullish about 2025. Our plans contemplate the guidance we set out and from everything we're seeing in the business, in our interactions with our users, in the operation, in our logistics, we feel highly confident in the guidance that we set out in front of the street.

And the next question comes from Chris Pasquale with Nefron Research. Please proceed.

Thanks. Wally, the ramp in logistics utilization has been nice to see. You talked about adding one more plane gets you to 22, and then it sounds like you plan to pause for a while. How do you think about the capacity that that fleet gives you and balancing the desire to really work those assets versus giving yourself some cushions so if one does go down for maintenance, you don't lose case coverage?

Chris, great question. Listen, we want to, in our remarks, we wanted to highlight that our primary focus right now is to make sure that we optimize the operation and really reach semi-steady state on the efficiency that we can build in the operation. That is our primary goal. If we see that demand is growing rapidly, if we see variability or high rate of unexpected maintenance event, we're not going to start the operation. I think Gerardo is very clear that we are still in growing mode. We are extremely fortunate to deliver 83% growth and profitability, but we are not going to starve that business. We still have a long way to go and a long runway of greenfield opportunity. I'll stop here and I'll pass it on to Gerardo to add any additional comment from his perspective.

Yes, Chris, thank you for the question. I think what we can think in summary is what we have been saying since the JP Morgan conference. respect to POS at around 22 aircrafts, that should give us the capacity of around having 18 to 20 aircraft operational in average every month. And when we add on top of that our pilot plan of double shifting, it certainly increases significantly the capacity. That's at least our theory, and that's why we want to test this year to make sure that we can sweat the assets and improve the operational efficiency and margins. So we still have a long way to go before we continue to acquire more airplanes. That's what I would say.

Thanks. That's helpful. And then maybe one for you, Gerardo. Just as we look at R&D spending over the last couple of years, it's more than doubled. You come into 25 with a lot on your to-do list in terms of projects and clinical trials and How should we think about spending growth this year for R&D versus SG&A? And does R&D need to step up as those clinical trials get started in the back half?

Right. Let me tell you that we expect to have some modest gains in operating leverage. So that said, I'm expecting that the overall operating expenses will grow at a lower pace than our revenue. Now, R&D, we will continue to invest strongly in R&D. We have OCS innovation. We have next-generation OCS. We want to continue to advance our kidney program. We will strengthen our product development capabilities. So we will continue to strongly invest in our long-term growth. After that, we're going to be strengthening our NOP and command center. We will continue to expand our clinical adoption team. And lastly, we will grow in modest weight or GNA functions as well. But overall, we're expecting to see some gains in operating, a modest gain in operating leverage.

Thanks. And our next question is from Matthew O'Brien with Piper Sandler. Please proceed.

Afternoon. Thanks for taking the questions. Maybe, Waleed, just for starters, when I look at the amount of organs you did in 24 versus 23, it's up just under 1,400. So really nice progress. If I just multiply that by four, add it to how many organs you did in 24, I'm still getting to more like 9,200 organs by 2028. And so I'm just wondering with a little bit more competition on the liver side, how did we bridge that extra 800 organs to get to 10,000? Are the heart and lung clinical studies enough to get you there? And is it more backend loaded to get you to that 10,000?

Thank you, Matt. Excellent question. Matt, today, we're driving growth from heart and liver or liver and heart in that order. Lung is really not driving much growth for us at all. And even in the heart, as I reported, we have a single digit penetration in the DBD, single digit. We are absolutely confident that the new clinical programs should contribute significantly one to resurrecting the lung program or a lung market for us to contribute to our growth and to increase our penetration in dbd heart transplants we are bullish on these two programs and that how we uh not only fill in the gap of those seven or eight hundred additional organs we think we are going we are going to do more than 10 000 transplants into 2028 just from heart, lung, and liver alone and not counting any additional organs that might be coming in the pipeline. So we're highly confident about that, Matt. And your math is correct if you assume that lung is dead or slow, very, very slow as we are or we have been for the last two years, but that's not our expectations. And that's why we're prioritizing the investments in these clinical programs.

Got it. That's very clear.

Thanks. And Matt, just to highlight one thing, it's back-end loaded for 2025, but we still have – these programs should be concluded by 26, and that gives us two years of full operating leverage with two additional market catalysts that we currently don't have, especially on the long front. I'm sorry if I interrupted you.

No, that's perfect. Thanks for that. And then, Gerardo – I don't want to get too specific, but, you know, you saw a step function improvement in operating margins in 24. You're saying modest improvement here in 25 as you're continuing to invest in the business. I don't know if that means a couple hundred basis points, 300. I don't know how we should think about that. But then do we get another step function improvement in 26, or do we need to wait until 27 for that, just given the investments on the clinical program side of things? Thanks.

Yeah, I do not want to share just yet any longer-term view in terms of margin, as we still, or I am still getting familiar to those long-term planning. But for 2025, what I can tell you is that we're expecting modest improvement in gross margin and modest, capture modest operating leverage at operating expenses level. That should give us some improvements in operating margin. I would rather leave it there. Understood. Thank you.

And the next question is from David Rescott with Baird. Please proceed.

Oh, great. Thanks for taking the questions. Congrats on the strong finish to the year here. Maybe just a follow-up, Gerardo, on those comments just around the margins in 25. You know, you ended the year on the service line with a, you know, high 20s. number in Q4 for service gross margins. You're at, you know, mid to high single, I guess, and operating margins. You know, does that high 20s service gross margin seem like a good kind of stepping off point for next year? You're still below that kind of mid 30s that you were at before. But when you think about the moderation through the year, should this, you know, 29% number on the service gross margins be kind of that low bar? Or could there be more variability to the lower end of that.

Thanks for the question, David. First, let me clarify that I have not said that we're going to target 35. That's my expectation. I am still going into the review for long-term views of what's really sustainable in the business. What I can tell you today is that in 2025, both in product and service margin, we're going to see some improvements. However, the increase of portion in the mix of service will moderate the overall margin improvement. That's how I see 2025.

And David, I would like to add to what Gerardo said. Your question was specific about the service. I think we all expect improvement in the service margin. However, we want to caution that if we get hit by unexpected high rate of maintenance as we had in Q3 of 24, that could negatively impact the margin because we will rely more heavily on third party logistics partner and not on our own operated aircraft. That's the only variability that might present itself. But on an overall year basis, we expect the modest improvement as Gerardo outlined.

Okay, that's helpful. When you think about some of the step up in bringing on new planes, my guess is that maybe you have a, I don't know if it'd be a fixed amount of kind of pilots, surgeons, clinical sports specialists for each plane. But when you think about bringing on some of those new planes, should we think about it being you bring out a new plane, you've got, I don't know, two pilots, two surgeons, you know, eight kind of dedicated clinical support specialists to each of those? Or as you scale, can you kind of spread across the clinical support staff for each plane, meaning that for every incremental plane that you bring on, you wouldn't expect the same amount of kind of dollar of op-ex associated with that new plane longer term? Thank you.

David, thank you. Very important question. No, you should not model at all that each plane have an incremental clinical heads addition. Our network is broad and our clinical network is broad from surgeons and clinical specialists. We do not tie our clinical staffing to plane. The only thing that we need to link to plane is Two important things. One, we need a pilot crew to crew the plane and the two to four weeks time that a plane needs to be on the ground waiting to be added to our Part 135 license. So not the minute we buy a plane, this plane can be operational. As far as pilots is concerned, we have a critical mass of pilots. We can operate those planes, but we are continuing to add because, as we stated, we are targeting to double shift somewhere between 20% and 30% of our fleet. So that will continue throughout the year. And we'll be monitoring the demand growth, and we will be titrating those additions to make sure that we're meeting that goal without running hot. All right.

And our next question is from Mike Mattson with Needham and Company. Please proceed.

Yeah, thanks for taking my questions. So I guess I just want to start with one on kind of, you know, the prices that you guys are charging. I understand your arguments that, you know, compelling value proposition and whatnot. But when I've talked to people, your customers and people in the transparent world, there's a lot of concern, hand-wringing, pushback about the pricing. I've seen some third-party research that cited the same thing. You know, I know you're continuing to see strong growth, but I'm just wondering, is there anything that you can do to try to, you know, improve that kind of perception that the pricing is too high, you know, from a marketing standpoint or something like that?

Thank you for the question, Mike. But really, again, we're delivering significant value to the market. We actually wholeheartedly believe that the value we're delivering far exceeds the price we're charging. That's number one. The penetration rates and the growth rates speaks for themselves. The market see that value, otherwise they would not have adopted the OCS. The growth and overall transplantation in the United States speaks for itself. The competition pricing is designed the way it's designed because of the low value the competitive technology bring. So we are not going to change our pricing because of a low value competitor decided to price their technology at a lower level than what Transmedics is doing. So that's number one. Operating the NOP and the full network effect of NOP gives us significant leverage to efficiently manage the entire process and pass some of that cost efficiency back to the transplant program. None of our competitors can deliver that cost efficiency to transplant program. I'll give you one example. For our NOP centers that are using the full spectrum of our service offering, including logistics, They get a 50% discount on the DCD donor that doesn't progress to become a donor. None of our competitor is even capable to even come close to making that offering. So yes, that technology might be $40,000 or $50,000, but the overall cost of the procedure is probably higher than transmedics. And that, again, we usually do not comment on our pricing. Our pricing is standardized across the United States. Every center knows what our pricing is. Every user knows what our pricing is. Every transplant administrator knows what our pricing is. And again, the results speak for themselves.

Yeah, okay. I mean, I guess I wasn't trying to say that you needed to lower your price, just maybe find a way to maybe pitch it to people in a more convincing way or something.

But I understand. I completely understand. And, you know, you highlight it right from a marketing perspective. We're doing that. Tamara and his team are doing that and continuing to improve and refine the messaging to highlight the key points that I summarized a couple of minutes ago.

Okay. I understand. Thank you. And then just with regard to the plane service, It almost sounds like you don't have a great visibility into when it's required, but I'm just wondering, is there some way to, you know, schedule it, you know, so it doesn't all sort of, you know, fall into a particular quarter like it did last year? I don't want to say it all fell into the third quarter, but you had kind of abnormally high level of service in one quarter. Is there a way to plan it ahead and maybe spread that out or something, or is it just really unpredictable?

Yeah. Mike, that's an excellent question. So for scheduled service, we have full visibility in that and we spread it across the year and we have some flexibility to schedule it and manage it properly. The part that we don't have any visibility to and it's part and parcel of operating a fleet is what is called in the industry AOG, airplane on ground. These are unanticipated, unexpected situations where the plane is not airworthy. And it could happen any day, and it could happen even in the middle of a mission. So these are the things that we don't have visibility to. But how do we manage it? We manage it by having a robust system. fleet by managing our own internal maintenance ourselves and not rely on 100% on third party. We can supplement with third party and building a network that we can scramble a jet from a nearby a transmedics jet from a nearby hub in case a plane is down unexpectedly in between missions. That's the part that our team is navigating and is doing a great job navigating every quarter. We experienced a lot of that AOG events in Q3. The team managed it extremely well in Q4, and we, again, we continue to expect to do that, but sometimes these things creep up on you, and we have to deal with it on the spot.

Okay, got it. Thank you.

At this time, there are no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Walid Hassanin for any closing remarks.

Thank you, Chris. Thank you all very much for your time. Have a wonderful evening. We're looking forward to our next call. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.