Ladies and gentlemen, thank you for joining us for the Pulmonx Quarter Four 2021 Earnings Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later, and instructions will be provided at that time. I would now like to hand the call over to your host, Ms. Lane Morgan. You may begin.

Thank you, operator. Good afternoon and thank you all for participating in today's call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer; and Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter and year ended December 31, 2021. 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 that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the safe harbor positions of the Private Securities Litigation Reform Act of 1995. Any statements contained on this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development are based upon our current estimations 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 those forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q filed with the SEC on November 9, 2021. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 23, 2022. Pulmonx Corporation disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Glen.

Thanks, Lane. Good afternoon, everyone and welcome to our fourth quarter and full year 2021 earnings call. Here with me is Derrick Sung, our Chief Financial Officer. Today, I would like to share a few highlights and contextualize our fourth quarter results before turning to our outlook and strategic priorities for 2022. Looking back on 2021, I'm very proud of the progress our team has made in an unquestionably challenging and unpredictable environment. For the full year 2021, we delivered $48.4 million in worldwide sales, grew our business 48% over 2020 and achieved three consecutive quarters of record sales, all while executing on each of our commercial and strategic goals. Specifically, we increased our commercial footprint in 2021, growing our base of U.S. treating centers 45% to 214 centers, enabling us to exceed our target of opening at least 200 centers by the end of the year. We met our sales force expansion targets, building out our U.S. sales management team to 9 region directors, adding 9 new sales territories in the U.S. to bring our total to 54 and adding 6 territories outside the U.S., bringing our total international territories to 34. We secured 10 positive coverage policies predominantly within the Blue Cross Blue Shield Association, including Anthem and thereby added coverage for over 50 million lives across the United States. We submitted in December 2021, our regulatory filings seeking approval for Zephyr valve in Japan and we initiated enrollment in our AeriSeal CONVERT trial, a multicenter, multinational study in Europe. Turning now to our performance in the fourth quarter. We delivered another quarter of record sales in the U.S., growing our business to $7.3 million. In the fourth quarter, we saw strength in the southern parts of the United States which were previously impacted by the Delta variant, offset by a new increase in COVID cases in the Midwest. Outside the United States, we recorded $6.4 million of sales despite being impacted by a mid- to late quarter Delta variant surge across major regions of Europe. As we entered 2022, the impact from the recent Omicron surge was widespread and simultaneous affecting all of our major U.S. and European markets. We expect the first quarter of 2022 to be significantly impacted by COVID with a recovery in our business starting in Q2 and with revenues continuing to accelerate in the back half of the year. Taking this into account, we expect first quarter 2022 revenues to be similar to the first quarter of 2021 in the range of $9 million to $10 million and full year 2022 revenues to be in the range of $55 million to $60 million. Despite the Omicron impact in the first quarter, we have conviction in the fundamentals of our business and the strength of our team. All signs continue to point to strong underlying demand for our Zephyr valve treatment. Physicians and hospitals remain eager to adopt our procedure as evidenced by 16 new hospitals which treated their first Zephyr valve patients in the fourth quarter. Patient interest has never been stronger as indicated by a more than doubling of patient calls into treating centers through 2021 as compared to 2020 and a doubling of the number of social media followers. Throughout the pandemic, we have proven that we have been able to adapt and grow our business, demonstrating strong commercial momentum during periods less affected by COVID. To best position ourselves for the recovery in procedure volumes, we will continue to focus on commercial initiatives in 2022 to expand our global footprint and drive awareness of our Zephyr valve therapy. While we now have full geographic coverage in the U.S. with our 54 sales territories, we will selectively and opportunistically add additional sales territories throughout the year and expect to end the year with around 60 territories in the U.S. We expect to continue our current pace of opening new centers and are targeting to have approximately 280 U.S. treating centers opened by the end of the year. On the international front, we will continue the expansion of our sales force and expect to add approximately three to five additional sales territories throughout the year, primarily within Europe. In addition, we will be making preparations for our geographic expansion into Japan. As I mentioned earlier, we formally submitted our regulatory application for the Zephyr valve to the Japanese authorities in December of 2021. Under the filing timeline, we anticipate regulatory approval by the end of this year. Following the establishment of reimbursement, we expect to launch commercial efforts in the back half of 2023, entering what we estimate to be a $1 billion market with approximately 100,000 patients in need of our Zephyr valve treatment. To prepare for commercialization, we expect to bring on a commercial leader and to start assembling a direct presence in Japan in the latter part of this year. Finally, we are excited about the progress our AeriSeal clinical development program has made. Last year, we initiated a multicenter international clinical trial studying the use of AeriSeal to convert patients with collateral ventilation into Zephyr valve eligible patients and expect to continue enrollment of this study through 2022. We also continue to progress with preclinical studies required for an IDA application with the FDA to conduct a U.S. pivotal trial. In summary, we are well positioned to accelerate growth in our business and to provide our life-changing Zephyr valve therapy to patients as we move out of the COVID pandemic. The underlying demand for our treatment and the capabilities of our team have never been stronger and I am confident in our ability to execute on our initiatives and goals as we've done in the past. I'll now turn the call over to Derrick to provide a more detailed review of our fourth quarter results.

Thank you, Glen and good afternoon, everyone. Total worldwide revenue for the three months ended December 31, 2021, was $13.7 million, a 39% increase from $9.8 million in the same period of the prior year and an increase of 40% on a constant currency basis. U.S. revenue in the fourth quarter was $7.3 million, a 49% increase from $4.9 million during the prior year period. The record U.S. sales reflect strong procedure growth and commercial momentum of our business in regions less affected by COVID. International revenue in the fourth quarter of 2021 was $6.4 million, a 30% increase from $5 million during the same period last year and an increase of 31% on a constant currency basis. International procedure volumes were impacted by the COVID wave that swept through parts of Europe in the back half of the quarter and led to the regional hospital procedure restrictions. Gross margin for the fourth quarter of 2021 was 74.8% compared to 72.0% in the prior year period. The year-over-year expansion in gross margin was driven by improved production efficiencies. Looking ahead, we expect gross margin to remain between 74% and 75% in 2022 as production efficiencies are partially offset by investments to add scale and redundancy to our supply chain as well as increases in material costs. Over the longer term, we continue to expect margins to gradually move up into the high 70% range. Total operating expenses for the fourth quarter of 2021 were $22.6 million, a 38% increase from $16.4 million in the fourth quarter of 2020. Stock-based compensation expense was $2.8 million in the fourth quarter of 2021 and $9.9 million for the full year 2021. Looking ahead, we expect operating expenses for the full year 2022 to fall between $100 and $105 million, inclusive of approximately $16 million of non-cash stock-based compensation expense as we continue to build out our commercial operations, invest in our research and development programs and further scale our business. R&D expenses for the fourth quarter of 2021 were $3.7 million compared to $2.5 million in the same period of the prior year. The increase was primarily due to an increase in personnel, clinical study, regulatory and development-related expenses needed to support our product development and clinical research activities. Sales, general and administrative expenses for the fourth quarter of 2021 were $18.9 million compared to $14.0 million in the fourth quarter of 2020. The increase was attributable to an increase in sales and marketing expenses as we expanded our commercial team and increased commercial activities and an increase in public company expenses related to the scaling of our general and administrative infrastructure. Net loss for the fourth quarter of 2021 was $13 million or a loss of $0.35 per share as compared to a net loss of $9.3 million or a loss of $0.27 per share for the same period of the prior year. An average weighted share count of 36.6 million shares was used to determine loss per share for the fourth quarter of 2021. We ended December 31, 2021 with $191 million in cash, cash equivalents and marketable securities, a decrease of $11.7 million from September 30, 2021. Finally, turning to our revenue outlook for 2022. We expect full year 2022 revenue to fall in the range of $55 million to $60 million which represents 14% to 24% revenue growth over 2021 and approximately 17% to 27% growth on a constant currency basis as we estimate foreign exchange to present about a 3% headwind to global sales growth. As previously mentioned, we have been seeing a significant widespread impact from the Omicron surge since the start of this year which has resulted in the delay in disruption of Zephyr valve procedures. Given this unique circumstance, we are providing quarterly guidance on a one-time basis for the first quarter of 2022 to be in the range of $9 million to $10 million. Based on current trends, we expect to see a recovery in our business in the second quarter and a sequential improvement in sales throughout the remainder of the year as procedure volumes normalize. With that, I'd like to thank you all for your attention and we will now open the call up for questions.

The first question comes from Joanne Wuensch from Citi. Your line is now open. You may ask your question.

Hi, this is actually Anthony on for Joanne. Thanks for taking our question. I guess just starting with guidance at the midpoint, it's pretty fairly below consensus. Can you just talk about more some of the assumptions that went into that guidance? And then what you're seeing now that we're towards the end of February?

Sure. I'll start, and Derrick can join in on the discussion of guidance. What we're experiencing in 2022 is mainly due to a weak start in the first quarter, where we were affected by Omicron across all our major regions. Unlike previous waves, this one impacted us all at once. The positive aspect is that it is disappearing quickly, but the downside is that it hit us hard and fast in various locations. Looking ahead, we've observed considerable weakness in the first month of the quarter, but we're seeing significant improvement as we progress through the middle of it and project into the latter part. We are confident in the fundamentals of the business. Although we've encountered similar situations before when recovering from COVID waves, this is the first time we've faced a wave that affected all our markets so intensely at the same time. Fortunately, it is subsiding quickly.

Thank you, Anthony. I’d like to add that regarding our Q1 guidance, as Glen mentioned, this is likely the most severe impact we’ve experienced from COVID during all the waves we've encountered over the past couple of years. Our Q1 guidance suggests that our revenue will be similar to what we achieved last quarter or last year. The winter wave we faced last year was not as widespread or simultaneous as the Omicron variant. This is what we are considering for our Q1 guidance. The good news is, as Glen indicated, we believe we are moving past this. Hospitals are starting to discuss reopening procedures around March. The timing of this reopening, whether it happens in early or late March, will influence Q1 somewhat, but it's a matter of when, not if. Looking ahead to the rest of the year, we feel optimistic about our ability to recover swiftly and regain momentum. We have consistently observed strength and momentum in our business during times of minimal COVID impact throughout the year. We are expanding our base of accounts and seeing an increase in customer and patient demand. Given the expectation that the worst of the pandemic is likely behind us, we are positioned well for reacceleration throughout the year. However, if there is one lesson we took from last year, it is to prepare for the unexpected. There remains uncertainty regarding the duration of hospital staffing shortages and the potential emergence of new variants later this year. We have endeavored to account for these factors in our guidance. From our current perspective, we are confident in our ability to meet the guidance we have provided.

Got it. Appreciate the color.

Thank you. We have the next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is now open. You may ask your question.

Hi, this is Charles on for Larry. Just maybe digging in a bit more on the Q1 guidance; so I'm just looking at the kind of year-over-year. I mean, 2021 also, I mean has a step down in Q1 with the extra wave impact there. Although like this one, it's looking, your guidance is implying some 30% sequential step down over Q4. So I think you've kind of explained that it's all hitting geographies at once and so that makes sense. But is that implying that you might think that there's like a quicker rebound when it is done, if it's not a long process impacting all geographies at different times, might that come back a little bit faster than what you saw last year at the same time? And then I have another quick follow-up to that.

Well, with regard to rebound, we obviously look at a number of different measures. And right now, I think one of the things that we've reported on in the past has been the active accounts. And active accounts, for example, in January were basically 31%. So 70% of our U.S. accounts were down in January which you basically have to go back to the beginning of the pandemic to be down at that sort of level. Late last year, or I should say, at the beginning of last year, late 2020, we got hit pretty hard as well. But that's the starting point. And we're seeing that build out in February, more and more accounts are coming back and we're seeing our average daily sales sort of strengthen across the period. So we are anticipating continued acceleration exiting the first quarter and then moving through the second quarter and beyond.

I would add to that, Charles, that the other biggest difference that we have between this year and where we were a year ago is that we have about 45% more total treating centers in the U.S. than we did last year. So we have a much, much greater base of accounts. And so, when we see the recovery in procedures and the recovery and activity of our accounts, just by definition, that base of accounts that we have is much greater and that's obviously going to be a significant tailwind for us this year versus last.

I have a quick follow-up. You mentioned the percentage of centers performing procedures. You often have a leading indicator with StratX scans to gauge upcoming procedures. When facilities are shut down or face restrictions, do you still receive that leading indicator from StratX scans? Are they continuing to schedule procedures for the future when operations may resume? I would appreciate any insights you can share on this topic.

Yes. No, it's a great question. So, it's actually something that we talk about quite a bit which is that when COVID hits heavy in a particular geography and of course, Omicron hit everywhere all at the same time. But typically, what happens is the folks that are managing the patients in the ICU tend to be pulmonary and critical care specialists. And when they get pulled away to do that service, they're not analyzing patients as possible candidates for our procedure. And as a consequence, much of the pipeline slows down. And so the pent-up demand, if you will, the sort of the first procedures that are done moving out of one of these waves are almost always largely composed of patients who are being rescheduled. So that's really what our pent-up demand is. StratX was lumpy in the fourth quarter in the Southeast, for example which got hit hard in the third quarter, was actually strengthening in the fourth quarter. We saw StratX up there, whereas the upper Midwest and across to, through Pennsylvania got hit hard in the fourth quarter and we saw StratX down in that geography as well. So we do see StratX soften during heavy COVID times. So it's not as though we were accumulating a lot of StratX scans in heavy hit areas during the Omicron wave that's now receding.

All right, that's helpful. Thanks, Glen and Derrick.

Thank you. Next question we have the line of Jason Bednar of Piper Sandler. Your line is now open. You may ask your question.

Hey, good afternoon, everyone. So I'll just ask another one here on the guide. I totally understand the challenges here that are weighing early in the year. But maybe hoping you can unpack a bit more why we shouldn't be thinking of account productivity improving even a little bit more than what seems to be reflected in the guide. I guess is the guide just have you done some conservatism right now without yet seeing that volume come back in the door January, February? Or is there something else that you're balancing with additional waves or hospital staffing issues as we think about the strength of that recovery coming back maybe beginning in that March-April time frame?

We want to be very careful about our commitments here. Last year, we observed some improvement in account productivity in regions of the country that weren't heavily affected. This was quite encouraging. We have been monitoring and reporting on this for the past two years, and it has been significantly influenced by COVID on average. However, when analyzing by region, we saw improvement in areas less impacted by the virus. Therefore, if we see a decline in COVID's impact over the coming year as we anticipate, we expect to see an increase in that productivity number.

And maybe I'll follow up just a bit, just by my model, playing with things here, it looks like productivity maybe doesn't improve until we get to like exiting this year and fourth quarter, maybe we can handle some of those offline. But just some quick back of the envelope, it looks like you're targeting maybe something in the range of 30% growth in U.S. Zephyr procedures for the second half of '22. And I'm not asking you to necessarily bless that, I know there's assumptions in there on what I'm assuming there for second quarter and how your international markets play out. But you've got some easy comps there from Delta and Omicron in third quarter and fourth quarter. I guess maybe the follow-up here is just why wouldn't procedure volumes be better than that 30% growth with the bigger customer footprint you have out there now?

We will focus on getting the engine going in the latter half of this quarter and expect to accelerate significantly on a quarter-over-quarter basis in the second quarter and then from the second to the third quarter. We're examining this from multiple angles, including the productivity perspective and the expected quarter-over-quarter increase we anticipate throughout the year. We want to be careful about our commitments.

Maybe if I could squeeze one more. Is there any limitation you have like operationally or with your commercial infrastructure that would prevent like maybe a faster acceleration or whether that's anything at the end customer level or, again, with your own sales force or production?

No is the short answer. The business is fundamentally sound according to our assessment. We're seeing metrics that give us great confidence; for instance, calls going into hospitals have increased by 100% year-over-year, and our social media presence has also grown by over 100%. We now have tens of thousands of followers. In late 2020, we introduced a patient opt-in feature that allows us to engage with patients and guide them through their treatment journey, which has resulted in remarkable growth from five figures to nearly six figures in that area. Additionally, as Derrick mentioned, we have 45% more accounts than last year, more representatives, and referring doctors are clearly focused on our initiatives, as we are on theirs. Therefore, we don't foresee any issues with our supply capacity. We're merely working to restart our operations. We haven't faced this situation before, except at the onset of the pandemic when capacity reservations were a significant challenge. For instance, hospitals in California with 600 beds largely closed their doors to nearly all services, leading to a huge drop in patient attendance. This just shows how much reservation existed. Now, with the Omicron variant, even though the infection rate in the U.S. has spiked, the proportional follow-through to ICUs has been much less severe, yet it still led to a considerable number of patients being admitted to ICUs across the U.S. and our key international markets. The unfortunate part is that this surge happened very quickly, but the positive aspect is that we are now well past the peak. We are observing signs of recovery, with significant revenue growth last week and encouraging scheduled procedures moving forward, as well as positive feedback from our customers. Therefore, there are no constraints; the fundamentals remain strong.

Yes, if I could add to your question about growth rates, Jason, our guidance suggests that while it may seem like there is around 30% growth in the U.S. over the last three quarters of the year, we expect well over 30% growth when looking beyond the U.S. This average takes into account the recovery from the Omicron wave we are currently experiencing. There is some uncertainty about how quickly accounts can recover and how fast we can restart, but we anticipate finishing the year with a year-over-year growth rate in the U.S. and globally that exceeds 30%.

Hi, good afternoon, Glen. Hi, Derrick. I was hoping if you could break down this sort of recovery discussion in a little more granular way. I feel like we've been sort of talking about the numbers holistically, a little more leaning toward the U.S. Maybe Glen talk a little bit more about what's happening internationally. I mean, the truth is when I look at my numbers, the U.S. held up better than I might have thought, sort of sequentially flattish, 4Q versus 3Q. The OUS was a lot weaker than I expected in modeling. I will just squeeze this last little bit. So was OUS worse than you expected? Is the recovery happening equally in each geography? How are you thinking about the unfolding of the year in that way?

There's a lot to unpack in that question, so let me start from the beginning. We were pleased with our last report in early November as we looked ahead, and a lot was happening at that time. The trends around that period showed a significant upward movement. Overall, we were satisfied with how things turned out in the U.S., considering all factors. However, we faced substantial challenges in the fourth quarter, particularly in the upper Midwest. For instance, in Michigan, the Delta variant had a severe impact, but the emergence of Omicron provided some relief for them since they were already struggling significantly late in the year. Nonetheless, we have a diverse range of accounts in the U.S., allowing us to perform reasonably well in the fourth quarter, resulting in solid outcomes. One unexpected aspect was the rapid spread of the Delta variant, especially in German-speaking regions of Europe. Southern Germany, specifically Bavaria and Saxony, experienced particularly heavy impacts, which surprised us and contributed to a shortfall relative to our earlier expectations. Looking at the situation in those areas, the trend in Michigan mirrors that of Germany, where Delta transitioned into Omicron, leading to worsening conditions. Omicron's spread led to setbacks in other regions as well, which were more substantial than we had anticipated. We are expecting a stronger first quarter, but Omicron may hinder that progress, largely explaining the overall shortfall for the year. As Derrick mentioned, we are not providing specific guidance, but if you look at the overall trajectory, we are exiting 2022 at a pace similar to our earlier projections from the time of the IPO. We’re making significant progress and feel confident about the foundation we've established and how we plan to build on it throughout the year.

So we're feeling really good about our gross margin, right? This quarter, we delivered just under 75%. That's the highest that we've ever delivered in the history of the company. So clearly, we're seeing the benefits of our production efficiencies and overhead absorption that I talked about materializing as we expected. We're always going to see some fluctuations in margin from quarter-to-quarter depending on in-period costs and product mix and things like that. But over time, we do expect our gross margins to continue to move higher as we've seen over the last couple of years. That said, in the near-term, we are going to be making some investments in scaling our overall production infrastructure and adding some redundancy to our supply chain which I think is ever important in the current environment. And we're also cognizant of some of these supply chain pricing pressures. We're seeing some very modest pricing pressure, all very manageable but we are seeing some hints of modest pricing pressure that's similar to what's being felt across the industry. So that's why we are guiding to stay kind of within this 74% to 75% range for the year right now. Hopefully, we'll be able to do a little better than that but that's where we're comfortable kind of starting the year at. But we do expect, as I mentioned, that over time, well, as you mentioned, too, that we'll continue to creep that gross margin up. And I think we can get to kind of the high 70% range over the next few years. And I think that still is primarily driven by continued production volume increases that drives production efficiencies. And so, I think when we get into that revenue range, with a nine-digit number starting with one, somewhere in that range and that's when I would expect that we would get to that high 70% gross margin range; and we feel very good about getting there.

Appreciate that, Derrick. Thank you.

Thank you. There are no other questions at this time. I would now like to turn the call over back to Mr. Glen French.

Alright, well, thank you all very much for your time and attention today. We also thank you for your continued interest in Pulmonx. Good afternoon and good evening.

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