TransMedics Group, Inc. Q2 FY2025 Earnings Call

Good afternoon, and welcome to TransMedics Second Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Laine Morgan from the Gilmartin Group for a few introductory comments. Please go ahead.

Thank you. Earlier today, TransMedics released financial results for the quarter ended June 30, 2025. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call, including during the question-and-answer portion of the call that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. These include statements about future events, results or performance, including commentary on potential market and business conditions, our examination of operating trends, the potential commercial opportunity of our products and services, the potential timing, outcome and value of new clinical programs, the potential impact of tariffs on our business, our expectations for growth and opportunities in our operations and financial guidance and/or projected expectations, including revenue, gross margin and operating expenses in 2025 and beyond. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by the 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 10-Q filed with the Securities and Exchange Commission on May 8, 2025, and our subsequent SEC filings, which are available at www.sec.gov and on our website at www.transmedics.com. You can find the company's slide presentation with information on second quarter 2025 results on the Investor Relations section of the TransMedics website. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, July 30, 2025. And with that, I will now turn the call over to Waleed Hassanein, President and Executive Officer.

Thank you very much, Lane. Good afternoon, everyone, and welcome to the TransMedics Second Quarter 2025 Earnings Call. Joining me today is Gerardo Hernandez, our Chief Financial Officer. Organ transplant therapy is experiencing a renaissance globally due to the growing recognition of the life-saving and cost-effective outcomes when treating end-stage organ failure. In the U.S., federal agencies and Congress are driving a national initiative to modernize the U.S. transplant system to enable greater utilization of donor organs to meet the growing demand for more and better organ transplantation. More recently, this July, the European Society of Organ Transplantation, or ESOT, published a call for action paper in The Lancet, the premier medical journal, highlighting the global importance of organ transplantation. Specifically, the paper reinforced the urgent need for health care systems to prioritize investments in organ transplantation as a critical health care strategy given the significant impact on health and cost efficiency of organ transplants. Against this backdrop, we at TransMedics have been relentless in driving significant positive transformation of the transplant therapy globally through our OCS technology, our unique NOP program in the U.S. This is what drives our mission-oriented TransMedics team and has enabled us to consistently execute and deliver on our plans. On today's call, as we look into the future beyond our exceptional 2Q performance, I will be sharing our near- and long-term vision of key strategic initiatives designed to grow our OCS NOP volumes beyond the 10,000 planned for 2028. Importantly, I will also provide our perspectives in response to some recent market confusion and noise following comments made by a certain player in the organ preservation ecosystem. But first, let me highlight our 2Q performance, which represents a new high watermark for both clinical cases and revenue. Our performance has also demonstrated the significant operating leverage potential of the TransMedics business, even as we continue to invest across several growth initiatives. We strongly believe that this quarter represents just one key milestone of many to come as we work towards achieving our strategic vision to drive TransMedics to become the global standard of care for organ transplantation. We are not stopping here. We are already ramping up our investments to drive the next several waves of growth that will deliver substantially more top and bottom line growth for TransMedics. Our success has been and will remain fueled by the unique TransMedics Trident. That is to say our disruptive and technically unparalleled OCS technology platform, our revolutionary NOP service model and our unique dedicated transplant logistics network. Now let me turn to a more detailed outline of our 2Q performance. The results speak for themselves. Total revenue for 2Q 2025 was $157.4 million, representing approximately 38% growth year-over-year and approximately 10% sequential growth from 1Q 2025. We experienced sequential growth across all 3 organ segments, driven by higher overall utilization and center penetration of OCS NOP in the U.S. As I mentioned, this enabled us to achieve a new high watermark for overall case volume. In fact, to dispel any confusion about some of the outside commentary on lung transplantation in the U.S., OCS Lung experienced approximately 14% sequential growth in 2Q. Our overall gross margin for 2Q was steady at 61.4%, similar to Q1. Meanwhile, we delivered operating profit of approximately $36.6 million in 2Q, representing more than 23% of total revenue and up from $27.4 million or 19% of total revenue in 1Q 2025. Finally, we have driven strong cash generation. We have significantly improved our billing cycle and maintained healthy AR collections, which collectively resulted in the addition of approximately $90 million to our balance sheet as we ended 2Q with over $400 million in cash. We hope these results cement our commitment to profitable growth and cash generation. We are humbled by these results, but we have our sights laser-focused on achieving and surpassing the target of 10,000 transplants U.S. NOP transplants in 2028. Importantly, we are planning to go well above that target in subsequent years. In fact, our pipeline strategy of adding the OCS kidney platform is designed to position us to achieve at least over 20,000 annual U.S. NOP transplant as we will outline later in this call. We are also actively exploring options of expanding our NOP model internationally. This will enable TransMedics to potentially nearly double our total addressable market, as Europe represents 45% of the global transplant numbers. Stay tuned. We still have significant growth ahead of TransMedics, and we won't rest until we deliver it. Shifting now to TransMedics transplant logistics infrastructure and performance. Transplant logistics service revenue for 2Q was $29.8 million, representing 56% year-over-year and 14% sequential growth. Throughout 2Q, we owned and operated 21 aircraft. In Q2, we covered 79% of our NOP mission requiring air transport compared to 78 in Q1. So we're nearly at our target of covering 80% to 85% of our NOP missions requiring air transport. Meanwhile, we're continuing to add to our pilot crew to enable us to experiment with double shifting a portion of our fleet to run even a much more efficient operation by year-end. Moving now to update you on our next-gen OCS Heart and Lung clinical programs and the status of the FDA IDEs. We are pleased to report that we have received FDA conditional approval for the OCS Lung IDE in July. We're continuing to collaboratively engage with FDA's leadership to address their final questions and are planning to begin the trial initiation activities after the summer vacation season. On the OCS Heart IDE, we feel we are very close to reaching similar agreement with the FDA leadership to enable the near-term launch of our clinical program. Based on the progress achieved with FDA, we feel we remain on track to launch both programs before year-end. As discussed at our last call, we see these clinical programs as potential major growth catalysts for 2026, but we are not counting on them contributing to our financial results in 2025. Now please allow me to directly and hopefully comprehensively address several misunderstood competitive commentary and the potential impact of U.S. National Transplant Modernization initiative that has become an unwarranted source of confusion and concerns recently. While we hold all companies operating in the field of organ preservation in very high regards, I want to be crystal clear that our expectation is that as TransMedics continue to execute and gain more market share, the results of our peers with smaller footprints in the market could be negatively impacted. This should not come as a surprise or be misunderstood as a negative indicator of TransMedics' current or future performance. Please allow me to repeat this sentence again. As TransMedics continue to execute and grow our market share in a certain market, our peers with smaller footprints could be negatively impacted. This negative impact on our peers should not come as a surprise to the Street or be misunderstood as a negative indicator of TransMedics' current or future performance. TransMedics can only be judged based on our own performance based on our own technology in our own market. Also, specific to the lung market, we have been very transparent in our view that the poor and equivocal clinical results associated with the non-portable and non-blood-based perfusion technologies have contributed heavily to the current apathy for lung perfusion in the U.S. Therefore, we see the recent competitive commentary on U.S. trends in lung transplant as a validation of our thesis. In fact, it is because of the above dynamic that we designed the Next-gen OCS Lung program to comprehensively overcome these old preconceived negative sentiments existing within the U.S. lung perfusion market. Specifically, we have designed the largest prospective randomized controlled trial in the history of lung preservation for transplant. Please remember that our INSPIRE trial was the largest at approximately 350, but the next-gen OCS trial will be even bigger than the INSPIRE trial. We're aiming at a total sample size that will exceed 450 DBD and DCD donor lungs that will be randomized between our next-gen OCS Lung platform versus cold, controlled static storage that is currently the standard of care. We are confident that if the clinical trial achieves the same level of success that we've seen in our preclinical testing, we will deliver far superior clinical outcomes without the limitations of time and distance. This will be supported by Level 1 clinical evidence compared to the cold storage method that lacks any prospective clinical evidence. If successful, we fully expect that this will further establish the OCS Lung as the next standard of care in lung preservation. With that, I will turn to our views on the long-standing and ongoing HRSA, CMS, U.S. House, and Congressional initiatives to modernize the U.S. transplant system. First, let me start by stating my personal belief that the U.S. transplant system is one of, if not the best, in the world. However, there's always room to improve and modernize to expand organ utilization while optimizing the care of transplant patients and donors. To be clear, TransMedics has been engaged publicly and privately with stakeholders on this topic, providing our views on how industry players like TransMedics can play a crucial role to support all stakeholders, including OPOs and advance the transplant donation ecosystem in the United States. For context on our views on this topic, I would refer you to our 2 public statements from 2022 in response to the RFIs by both HRSA and CMS, and these statements are written statements published on both HRSA and CMS web pages. Importantly, the success of U.S. NOP in facilitating the growth of overall national heart and liver transplant volume has not gone unnoticed, and we are working with every stakeholder of the U.S. transplant ecosystem to ensure that they understand the following critical facts: First, TransMedics NOP is a win-win-win to every stakeholder in the U.S. transplant system with an interest in saving more lives in the U.S. This includes OPOs, HRSA, CMS, commercial payers, and most importantly, patients and their families. Second, TransMedics clinical value is supported, and the impact on overall transplant volume is supported by hard data and facts that have been collected over the last 3 years through our NOP infrastructure. And finally, TransMedics is here to stay and ready to serve as a critical and trusted partner in the efforts to modernize the U.S. transplant system to maximize donor organ utilization and save more American lives. As a show of our commitment to this goal, we have taken several actions. For example, we made significant investments to scale our digital NOP ecosystem to give maximum transparency to all U.S. NOP transplant stakeholders. We are expanding our leadership team with dedicated strategic and public affairs experts to ensure that TransMedics is well represented and our data is front and center to any discussions with the stakeholders. And finally, we are actively engaged with all stakeholders involved to make our positions clear and to avoid any misunderstandings or confusions. As you can imagine, emotions are running high for some, and we need to stay balanced and lead only with facts and data. Finally, we have several strategic initiatives underway to support this work above. We expect to provide more details as they unfold over the next several quarters. With that, I also want to take a moment to address a point of confusion following the review of a few unfortunate DCD cases in a recent New York Times article. Please let there be no uncertainty. The declaration of death for any DCD or DBD donation case in the United States is entirely independent of the organ procurement surgeons, whether it's TransMedics NOP surgeon or any other procurement entity. This is purely and solely with the responsibility of the independent declaring physician working for the donor hospital and contracted by the local OPO. There is a crystal clear line of demarcation of this particular clinical responsibility. Please remember that while this is a complex market dynamic, there are clear and established protocols in place and that TransMedics NOP surgical procurement team strictly adheres to these established protocols. With that, let me return to the fundamentals of our business. Our TransMedics OCS platform, the OCS NOP clinical support model, and the dedicated transplant logistics network and more recently, the entire NOP digital ecosystem were all prospectively designed to give TransMedics a significant unique position that could operate freely in both the current transplant system as well as any potential system of the future. We are not sitting still. We are working with all stakeholders to ensure that the success of our model in saving more American lives is well recognized and that we will continue to deliver cost-efficient transplant services that meet the highest clinical standard for our users, partners, and most importantly, patients in need. I want to repeat again, TransMedics is here to play a critical role, and it's here to stay, whether in the current system or any system of the future. Before I conclude, please allow me to summarize at a high level, ongoing and planned investment initiatives designed to catalyze growth over the next several years. More specifically, we intend to: one, expand our infrastructure footprint to best position us to scale well beyond 10,000 transplants and attract and retain top-tier talent capable of supporting our Gen 3 technology requirements. Specifically, we are now fully engaged in identifying the best location to be our new long-term global headquarters for TransMedics. Two, deliver on our OCS platform pipeline of OCS Kidney, followed by Gen 3 OCS platform for heart, lung, and liver. Three, expand our entire U.S. OCS NOP clinical and logistics team to meet the growing demand and minimize bottlenecks. Four, position ourselves to capitalize on any opportunities stemming from the national modernization initiatives. And finally, we are strategically exploring select geographical expansion opportunities. This entails evaluating the potential for replicating the successful OCS NOP across several European countries. It has become increasingly clear that there is a significant interest for TransMedics to replicate our U.S. success outside of the U.S., including the dedicated transplant logistics network in European countries. We are thrilled by this potential. And as we always say internally, if TransMedics doesn't do it, who would? Based on the above, you can see that we are not slowing down. To be clear, given the breadth and magnitude of opportunities ahead, combined with our demonstrated ability to generate operating leverage and free cash flow, our near-term capital allocation strategy is growth-oriented. Again, our near-term capital allocation strategy is focused on growth. While our operating margin will fluctuate somewhat as we deploy capital across these initiatives, we have a high degree of confidence in our long-term ability to deliver substantial top and bottom line growth while aiming at consistently maintaining positive cash generation. Now let me conclude my remarks by commenting on our expectation for the remainder of 2025. First, I'll remind you all that we are in Q3, which includes the summer vacation season for our users in the U.S. and outside of the U.S. We fully expect to see some minor and transient seasonality in our 3Q performance, similar to what we saw last year. To be clear, we expect this seasonality to be transient and minor in nature. Importantly, we fully expect to end the year strong as we did last year. That being said, our exceptional first half performance and strong overall trajectory give us the confidence to raise our full-year 2025 revenue guidance to between $585 million and $605 million, representing approximately 35% growth over full-year 2024 at the midpoint. With that, let me turn the call to Gerardo to cover the detailed financial results for the quarter.

Thank you, Waleed. Good afternoon, everybody. I am pleased to be here to discuss TransMedics' strong second quarter results. Please note that a supplemental slide presentation detailing our second quarter 2025 results is available in the Investors section of our website. As Waleed highlighted, we sustained momentum through Q2 with disciplined execution across the entire TransMedics team. Strong transplant volume growth, combined with the positive impact of our ongoing strategic investments drove solid performance across both product and service lines, along with continued margin expansion and improved profitability. U.S. transplant revenue was approximately $152 million, up 40% year-over-year and 10% sequentially. By organ, liver contributed with $116 million, heart, $32 million and lung $4 million. OUS revenue was $4 million, down 12% from Q2 of 2024 and up 2% sequentially. OUS revenue by organ was $3.5 million in heart, $0.4 million in lung and $0.2 million in liver. Product revenue for the second quarter reached $96 million, up 34% year-over-year and 9% sequentially. Growth was driven by increasing organ utilization in liver and OCS adoption across both liver and heart. Service revenue for the second quarter reached $61 million, a 44% increase year-over-year and 11% sequentially. The primary driver was logistics revenue, which grew 56% year-over-year and 14% sequentially, fueled by the continued expansion and utilization of our aviation fleet. Total gross margin for the quarter was approximately 61%, representing an increase of 78 basis points compared to Q2 of 2024 and broadly aligned to Q1 of 2025. The year-over-year increase was primarily driven by a 431 basis point improvement in service margin, reflecting higher TransMedics fleet utilization and cost efficiencies in logistics operations. Product margin was flat compared to Q2 of 2024 and declined 172 basis points sequentially, largely due to higher freight expenses. The increase in freight was a deliberate action to accelerate inventory replenishment to our hubs. Overall, we are seeing the expected progress in gross margin improvement driven by operational efficiencies and the benefit of scale. That said, we expect this improvement to moderate in the second half of the year as scheduled aviation fleet maintenance ramps up in Q3 and becomes more pronounced in Q4, as previously discussed in our Q1 call. Total operating expenses for the second quarter of 2025 were $60 million, up 6% year-over-year, and the increase was primarily driven by a 15% increase in R&D expenses, reflecting continued investment in our innovation pipeline and a ramp in support to our product development capabilities. SG&A expenses grew 3% year-over-year, driven by ongoing expansion of our IT infrastructure, investment in strategic growth initiatives, and the impact of inflation. Sequentially, total operating expenses were broadly in line as a modest increase was mostly offset by the absence of nonrecurring legal expenses incurred in Q1 of 2025. Operating income for the quarter was $37 million, up 192% year-over-year and 33% sequentially. Operating margin expanded to 23% compared to 11% in the prior year and 19% in Q1 of 2025. Net income for the second quarter was $35 million, representing a 186% year-over-year increase and 36% sequentially. Earnings per share were $1.03 and diluted earnings per share were $0.92 for the second quarter of 2025. We ended the quarter with $401 million in cash, up $90 million from March 31, 2025. This increase was driven by strong operating cash generation, supported by meaningful improvements in our billing cycle, which together with the continued healthy collections reduced our accounts receivable balance, underscoring our commitment to process efficiency and our focus on efficient working capital management. Our first half results reflect disciplined execution, continued gains in operating efficiency and meaningful progress in our clinical and innovation programs. Together with the scalability of our business model, these results continue to validate our ability to drive meaningful financial improvement and position the company for sustained momentum through the rest of 2025 and beyond. Looking ahead, given the strength of the business, as Waleed mentioned before, we are raising our full-year revenue guidance to a range of $585 million to $605 million, up from our prior range of $565 million to $585 million. This reflects approximately 35% growth over 2024 at the midpoint. Growth is expected to continue to be fueled by the expansion of total transplant volumes, increased OCS adoption and the continued momentum across our service platform. Our updated guidance reflects the strength of our first-half results and sets a prudent baseline for the second half with clear room for upside as momentum continues. In terms of gross margin, we continue to expect overall gross margin to remain approximately at 60% over the coming years. This accounts for the various factors influencing both product and service margins beyond just mix. In terms of capital allocation, we are focused on initiatives that drive long-term value, balancing strategic growth with financial discipline to deliver sustainable profitable growth. Our investments will continue to prioritize R&D to advance our pipeline, implement systems that simplify and automate core processes and improve efficiency across our logistics operations. One example of this approach is our double shifting pilot program designed to optimize fleet utilization. We know additional jets will be needed to support continued growth. And this program will help determine the right fleet size to drive operational efficiency and maximize the return of our capital investments. We expect to see early outcomes of the program in the first half of 2026. While our target remains to own 22 jets by the end of 2025, we will continue to be opportunistic moving forward only when the right conditions are in place. That may mean holding off on additional purchases this year or accelerating acquisitions if favorable opportunities arise. At the same time, we will make targeted investments to support growth well beyond 2028, including the development of our NOP network in selected international geographies, our planned move to a new global headquarters to accommodate the growing scale and complexity of our business and continuing with ongoing enhancements to our manufacturing and product development infrastructure. These initiatives are at different stages of implementation and will be rolled out over time. Together, they represent critical steps to position TransMedics for its next phase of growth as we work to surpass 10,000 transplant milestones and expand our global leadership in organ transplantation. Finally, with stronger top line performance, continued efficiency gains, and spend discipline, we expect to deliver at least 650 basis points of operating margin expansion for the full year of 2025 compared to 2024. While quarterly variability is expected, as Waleed highlighted, we are confident in the full year step-up driven largely by greater leverage across our operating expense base. Over the long term, we are targeting an operating margin at or approaching 30% by 2028. The path may not be linear year-over-year as we continue investing in the capabilities and infrastructure outlined earlier. Our differentiated OCS technology, combined with our NOP and vertically integrated logistics capabilities give us a unique advantage to broaden access globally. Built on these strengths and addressing the significant unmet need in organ transplantation, we believe TransMedics is well positioned to deliver sustainable growth, expand margins, and create substantial long-term shareholder value. And with that, I'll turn the call over to Waleed for closing remarks.

Thank you so much, Gerardo. Overall, we're very pleased with our 2Q performance, which once again underscored the unique attributes of TransMedics business. TransMedics is not only a top line grower but also an increasingly profitable business capable of generating significant bottom line leverage. We remain confident that this is just the beginning, and we believe we are well positioned to deliver sustainable long-term financial results while also investing significantly in our business as we gain more efficiency of scale and continue to deliver leverage throughout the operation. TransMedics is a very unique business, providing unparalleled life-saving solutions in a huge untapped market. We look forward to continuing our upward trajectory while saving more lives and delivering significant value to every transplant stakeholder, not just in the U.S. but globally. With that, I will now turn the call to the operator for Q&A.

The first question comes from Allen Gong with JPMorgan.

So my first question is kind of going to be on the seasonality, right? And I think you've done a really good job of preparing us for seeing that kind of summer disruption from dock locations, from aviation maintenance. So I'm just curious about what you're seeing so far in July because we have access to the very high-level data showing kind of the summer dip as expected, but just curious to hear what you're seeing relative to expectations.

Allen, thank you for the question. We're seeing some signs of seasonality, maybe not as pronounced as last year, but it's still early. August is about to start, so it's still early. So we assume some seasonality in Q3, given all the factors we described. And yes, we are starting to see it in July. But again, what we've seen so far is, I would call it, a slightly less impact than last year. But again, it's too early to really make that a trend.

Got it. And then kind of moving higher level to some of the news that's been coming out recently, the New York Times podcast that came out today, kind of talking about how there's a lot of pressure to grow organ volumes, you kind of corroborating what you're saying, you're a really important partner with that. And while you made it very clear that your side of the business is very separate from the side of the business that actually makes the termination of DCD. Are you concerned at all that greater oversight over OPOs, over DCD usage could lead to, unfortunately, like an impact on you just because there are fewer of those procedures happening, centers are being a bit more cautious, what have you?

That's a very important question. I see it as the opposite. Some level of organization and oversight will actually benefit the transplant market, especially in DCD. We have been debating this notion of NRP for the last two years. It was implemented haphazardly, costing the system significantly and resulting in the unnecessary loss of many organs. These organs could have been placed in OCS, protected immediately, saved, and done in a much more cost-efficient manner. Unfortunately, the implementation was flawed due to a lack of oversight. This serves as one example that some oversight could potentially be beneficial rather than detrimental. We have to wait and see. As I highlighted earlier, we feel confident that the unique attributes of our business enable us to operate in the current system or any future system, and we stand by that statement.

Our next question comes from Chris Pasquale with Nephron Research.

Congrats on the quarter. Waleed, to start with, congratulations on getting the IDE approved for the lung trial. Just curious whether you can share if there were any substantive changes in the design of that trial with what you agreed to finally with the FDA relative to what you laid out in the proposal at ISHLT.

Chris, thank you for the question. The clinical trial design, as we know it, is not touched. Most of the remaining questions are actually focused on preclinical testing, working with the preclinical testing reviewer. So I'm not aware of any changes to the clinical trial design as we outlined in ISHLT, and we're looking forward to wrapping this part up and publishing the full design of the clinical program on clinicaltrial.gov sometime in late August or early September as we approach the IRBs and the trial will be in the formal kind of initiation process.

Great. And then curious your thoughts on the U.S. heart market. Your own business there continues to grow really nicely. Your penetration continues to tick up. But if we look at the last 6 to 8 quarters now, the market itself has been relatively flat. We saw some growth in 1Q, but that kind of reversed this quarter. And so we're still on that flattish trend. What do you think is holding back volumes in that segment? And maybe contrast that with the continued strong growth we're seeing in liver? And what can you do to get it growing again?

Chris, as we mentioned previously, the heart market experienced double-digit growth last year and the year before, but overall, it has seen fluctuations due to the dynamics of organ transplants and the replenishment of waiting lists. This variability contributes to the quarterly changes we observe. Our strategy to address this and stabilize growth moving forward hinges on the approval of our heart clinical program, similar to the lung program. We anticipate significant changes with the rollout of our next-generation heart technology. Although the heart market experiences seasonal variations, I believe it will stabilize by Q4 and likely continue improving into 2026. The introduction of the heart and lung next-gen initiatives is expected to create notably different market dynamics in 2026. Additionally, we've discussed the impact of DCD, which has a higher rate of non-progression, affecting the heart more significantly. However, as DCD oversight improves, we expect this issue to alleviate over time. We view this slowdown as temporary. The rates of heart failure and the expansion of waiting lists continue to rise, and we play a crucial role in increasing the supply of organs. Therefore, there is no reason to believe that this transient slowdown will persist in the long term.

Our next question comes from Josh Jennings with Cowen.

Congratulations on another strong quarter. It's clear that TransMedics is well positioned to succeed as the U.S. transplant network modernizes. I know your team has been actively meeting with various committees and Congress members this year. Do you foresee any challenges for TransMedics as the U.S. transplant network evolves? Or is it, as you've indicated, that the technology, the NOP, and logistics are all contributing to the growth in transplant volumes, which is the objective of this modernization?

Thank you for the question, Josh. I want to provide a balanced response. The results of the NOP are clear and are being recognized by all stakeholders. The primary driver of this transformation is the increase in national transplant volume, which has been ongoing for a significant part of the last five years. The increase in national transplant volume in the U.S. has not come from these initiatives yet; it has come from the NOP, the OCS, and the integration of logistics. This is not going unnoticed by stakeholders. We are not experiencing any headwinds. However, as you might expect, emotions on the other side may be heightened, and there could be unfounded fears among OPOs about potential decommissioning or that TransMedics wants to take over. That is not our intention. We work collaboratively with OPOs because our goals are aligned. That’s why I wanted to be balanced in my response. Do we see any headwinds from stakeholders? No, because the data is clear, and our objectives align for everyone's benefit. However, as this is an emotionally charged and sensitive issue for major stakeholders who have been operating in a largely unipole system for over 40 years, some misunderstandings are to be expected. That’s why we are proactive in our communication and engagement, continually emphasizing that we are here to collaborate with the existing system, as well as any future modifications. I hope that answers your question, Josh.

Yes. Regarding the clinical trials, you've made good progress with the FDA and expect to start both trials before the year's end. I was curious if you could provide any updates on CMS in relation to reimbursement for the trials, particularly concerning the study groups for heart and lung clinical development.

We're not engaged with CMS just because we're already approved with the technology. The modifications we're having, we don't see this as requiring any CMS engagement at the moment.

Our next question is from Ryan Daniels with William Blair.

This is Matthew Mardula on for Ryan Daniels. I want to talk about the lung transplants. And I know lung transplants are a small percentage of your revenue right now. But how do you see the next-gen OCS helping penetrate into the lung transplant? I know you've mentioned before that next-gen OCS will account for a small amount of revenue this year, but any insights into the growth of it next year or long term would be great to hear about.

Thank you for the question, Matt. I think I'll keep this high level. I think the lung trial or the next-gen OCS platform is designed to address the 2 or 3 major historical concerns that have plagued the U.S. lung perfusion market based on the suboptimal outcomes seen at the early ex vivo perfusion study. So what are these perceptions? The perceptions are that the longer the lung are perfused, the higher the probability of the lung getting edematous. The longer the lung is perfused, it may not work after transplant, that sometimes the system is not protective of the lung, and there's a hesitation of taking a lung for proper evaluation on machine perfusion. There is the perception that putting the lung on ice overnight is safe. Why? Because there is no data to prove or disprove any of these subjective individual perceptions. First, the OCS next-gen technology for lungs is designed to overcome all the limitations of the historical perfusion technologies that were in the market in the U.S. We reduced edema significantly. We maintain lungs for extensive periods of time, exceeding 24 hours. Now we're conducting the trial comparing ourselves to cold storage, and we're allowing the comparison for any types of lungs, DBD or DCD. So we will prove with Level 1 evidence that the OCS will have potentially superior outcome through cold storage. So we will kill 2 birds with one stone. One, overcoming the historical limitation of non-portable acellular perfusion. And we will hopefully unequivocally deliver Level 1 evidence proving the superiority of the OCS platform over cold storage. That's what gives us the excitement about the potential future of our lung next-gen platform to give us access and not just access to become the next standard of care in that market. That's why we're investing and putting our dollar and our investment where our mouth is to prove that we are superior in both fronts. That's what gives us the confidence and excitement. And we just can't wait to go execute this trial and actually deliver the Level 1 evidence to prove it.

The next question comes from Matthew O'Brien with Piper Sandler.

This is Samantha on for Matt. Congrats on a good quarter. I guess I want to talk first about what you're hearing in the field about DCD donations. Are there any increasing concerns in the operating room following the New York Times article? And then also, I guess, bigger picture, where do we stand in terms of utilization of DCD organs? And how much more room is there to grow in that category?

Thank you for your question, Samantha. We are not seeing any hesitation, concern, or reduction in DCD donations. DCD donation is essential and here to stay, playing a vital role in the resurgence of organ transplantation. The incidents mentioned in the New York Times article have been known within the field for a significant amount of time, approximately the last two years. This information is not new, and unfortunately, it was presented as sensational news. Those within the community have been aware of these cases for the past two years. Therefore, we are not experiencing any pullback or concerns related to this matter. Could you please repeat the second part of your question?

Sure. Just about utilization of DCD organs.

Utilization of DCD remains unchanged between 50% and 55% that actually materialize to become a DCD donor. There's between 45% to 50% that does not progress to become a DCD. That number has not changed materially, at least across all 3 organs.

Great. If I can sneak in one more about the next-gen clinical programs. I know you said previously that both arms of the trial will use the NOP service. How will that work specifically in the cold storage arm? Will that still generate revenue for you?

The plan is for both arms to go through NOP to keep the accepting surgeon blinded. I'll hold off on discussing revenue generation until we start the trial to better assess the rollout. However, we do expect some revenue from logistics on the control arm. We're waiving the service fee for our surgeons and team who procure these organs as a gesture of good faith to ensure we're not profiting from technologies that don't belong to us.

The next question comes from Bill Plovanik with Canaccord.

It's Zachary Day on for Bill. Congrats on the quarter. So you called out that it was heart and liver that drove the quarter. Just taking a step back, are there any share trends you wanted to call out in Q2, whether it's on the organ specifically or DBD and DCD broadly?

Zach, thank you for your question. As you are aware, we do not provide updates on market share throughout the year. We typically discuss our year-end share figures due to the various fluctuations that occur from quarter to quarter. However, we are consistently gaining market share in heart and liver, and to a lesser extent in lung, although the numbers in that area are small.

Got it. And do you have thoughts on any new competition coming into the liver market later this year?

Not that I'm aware of. Are you aware of any?

Yes, we have heard that there are private companies entering the market, or at least one is being mentioned, but I won't disclose their names during this public call.

Thank you. We always welcome competition. It keeps us honest. And as long as we're all aiming to save lives, that's a great thing for organ transplant.

Our next question comes from Justin Wang with Morgan Stanley.

I'm just filling in for Patrick. I was wondering if you can spend a few minutes to talk more about NOP Access. What has early surgeon and center feedback been like? And how do you see this affecting the overall NOP ecosystem longer term? Separately, can you talk about how Access will work with OCS Connect?

Thank you for the question. The initial feedback we've received from the first couple of dozen users has been outstanding, surpassing our expectations. It's still early, but we are grateful for this success. NOP Access is an enhanced version of NOP Connect, meaning they are not separate platforms. The customer-facing aspect of the ecosystem is the access, while the back-end part is NOP Connect. They function as one integrated system, working together smoothly. Additionally, there's a logistics and route mapping component that also operates seamlessly within the ecosystem.

The next question comes from Suraj Kalia with Oppenheimer.

Waleed and team, congrats on a great quarter. Can you hear me all right?

We can hear you okay, Suraj.

Waleed, great quarter once again. I remember in the last quarter, you mentioned that growth for the fiscal year could be between 2% and 5% from the clinical trials. However, I thought I heard you say in your commentary that you are not expecting any growth or contributions from the clinical trials, yet you are raising guidance. Did I understand that correctly, or did I miss something?

Thank you, Suraj. Let me clarify the first comment. The 2% to 5%, I believe, came during our Investor Day. So that's in December. Last call, end of the year, we said we do not expect any substantial contribution. This quarter, we're saying we have enough organic growth that we're not even counting on any growth from the clinical trial in '25. As Gerardo said in his commentary, there is some potential upside. But just given the timing of initiation of these trials, I did not want the community to factor in any substantial growth or any growth for that matter in '25. There's enough organic growth in our business that we will meet the guidance as outlined.

Got it. And Waleed, for my follow-up question, for the next-gen OCS, the lung trial is obviously a superiority trial. And you mentioned a lot of factors contributing to poor lung uptake, reducing edema, graft failure, so on and so forth. Wally, what parameters in the next-gen OCS specifically give you confidence in generating superiority? Is there a difference in perfusion parameters, event rate assumptions in the null hypothesis? Any additional color at this stage that you can give us to help gauge the confidence in generating superiority? Gentlemen, congrats again.

Thank you very much for the question, Suraj. The details and statistics will be outlined in the clinicaltrials.gov posting for the trial. At a high level, what gives us confidence is that the most common and serious short-term complication after lung transplant is primary graft dysfunction, Grade 3. This condition involves lung edema that affects the lung's ability to provide oxygen. We are confident because we significantly reduced lung edema in our preclinical testing compared to all control subjects. Additionally, we have improved the ventilation system and adjusted the perfusion flow to reduce hemolysis, which provides us with better physiological control over lung perfusion and ventilation than ever before. However, until we replicate these findings in a clinical program, this remains our thesis and hypothesis. We are excited about the strength of our preclinical results, so stay tuned.

Our next question comes from David Rescott with Baird.

On the really strong quarter here. I appreciate the comments on seasonality, typical Q3 seasonality that you've seen. There's been some focus on the third-party flight data just around the volumes or the trends in July. And I wanted to confirm at least it looks like from our perspective that pretty much the trends that you're seeing in July so far quarter-over-quarter are pretty much exactly what you saw last year in the month of July. So I wanted to clarify that at least nothing in July so far is different from the typical seasonality that you've seen. And when I think about the comments that you made already on it. When you look at what you saw last year on a quarter-over-quarter basis, it kind of pulled down the U.S. revenue down, I think, 3% to 5% or so on a quarter-over-quarter basis. So when you think about the way Q3 is shaking up, is there anything in your mind that leads you to believe that the seasonality you saw last year is not the right kind of guidepost for where seasonality could be shaking out this year?

Thank you, Dave, for the question. Let me address the first part. I'm only commenting on what we've seen in July. The flight tracker has never been 100% accurate, and I’ll leave it at that. Additionally, with our vertical integration of logistics and the more physiological protection of OCS, we sometimes rely more on ground transportation than flights. A third-party flight tracker, while respected, does not fully reflect our business. As for July, it does not raise any new concerns; it's consistent with the typical seasonality we've experienced over the last two to three years during the summer. We're not alarmed; it's pretty much business as usual. If anything, as I mentioned in response to Allen's question, it appears to be slightly less impacted than last year. However, it's still early in the quarter, and anything can happen. Regarding last year compared to this year, I don’t have enough data to determine if last year was the standard or not. Last year produced a visible decline of about 3% to 5% quarter-over-quarter, but we rebounded in Q4. Looking at our second half, we recorded a 9% growth last year. These numbers seem reasonable to project for this year, but I’d also like Gerardo to share his perspective.

David, a few days ago, one of our analysts examined the transplant volume seasonality between Q3 and Q4 for the years 2022, 2023, and 2024. The analysis concluded that there is no consistent seasonality, but the degree of seasonal changes varies from year to year. Therefore, we can't rely on a single line or assumption for this year. We are confident about the full year, aware of a slowdown in Q3, but we expect to bounce back and stay within our guidance. I believe our guidance establishes a sensible baseline with the possibility of exceeding expectations.

You raised your operating margin guidance for the full year compared to the last quarter and from the beginning of the year, suggesting a slowdown in the growth you experienced in the first half. My question is whether there is any expected contribution from the clinical trials that should be underway in the second half of the year. Additionally, as we project the incremental dollar amount per case in the clinical trial through 2026, how should we anticipate clinical trials affecting our P&L, particularly regarding R&D, operating expenses, and gross margin?

For this year, the primary factor contributing to the increase in operating margin is the operating leverage we expect to gain at the operating expenses level. I previously mentioned an increase of at least 650 basis points. This expectation is largely driven by the investments we anticipate making in the second half of the year. Some of these investments are at varying stages, so depending on their progression, they might extend into next year. That’s why we’re taking a conservative stance by stating at least $650 million. There could be potential for additional upside if we exceed our guidance range or defer a project to the following year. However, it’s important to note that the improvement is not being driven by the clinical program but rather by our operating expenses and planned investments for the latter half of the year. Regarding 2026, I’d like to reiterate my earlier comments: we expect to reach, or be close to, a 30% operating margin by 2028. The trajectory may not be straightforward, but we are confident in it. I prefer not to discuss next year at this point, and I will provide further insights on 2026 when we're ready to offer more guidance.

Our next question comes from Mike Matson with Needham & Company.

I guess I just want to ask one on the heart and lung clinical program. So I understand it's not going to have much of an impact this year. But looking at next year, how many of those patients that get enrolled in the trial do you think would kind of otherwise have been captured by TransMedics as transplants and you would have gotten OCS revenue from? In other words, is it going to be cannibalizing some of the existing business you otherwise would have had? Or is it going to 100% be additive to your volumes?

Thank you for the question. As we've mentioned before, there are hundreds of patients we currently don't have access to. From the 450 lungs, we anticipate that 300 patients are not accessible to us. Similarly, for hearts, approximately 300 to 350 of those are DBD hearts that we currently do not have indications for. We've discussed this previously. The goal is not to reduce our existing volume but to expand and enhance our indications.

Yes. No, no, I know long term, it would increase. I was just wondering if some of the patients that may have.

No, I'm talking about even at the short term.

Okay. All right. And then you commented on a lot of the headlines in the quarter, but there was one thing I didn't really hear anything on, and I just thought I would ask about it. So one of your competitors, OrganOx, got approved for use of their device during flights. I know they don't have the logistics capabilities, at least as of now or planes or anything like that. But do you think that, that changes the competitive dynamics at all or makes them any more competitive in liver than they already have been?

Mike, I've mentioned this before, and I appreciate your question. The OrganOx device was designed specifically for a back-to-base model. It simply cannot operate in flight, even with hypothetical modifications. Its size and dimensions, when compared to aircraft configurations in the U.S. or for charter flights, would necessitate a very large jet, and not just any large jet would suffice. The costs involved would be prohibitively high. Additionally, the device lacks the necessary battery capacity. I believe this concern is unfounded, and we do not perceive it as a threat. The device is intended solely for back-to-base operations.

This concludes our question-and-answer session. I would like to turn the conference back over to Waleed Hassanein for any closing remarks.

Thank you all very much. Have a wonderful evening, and we look forward to continuing the dialogue. Bye.

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