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Operator: Thank you for standing by. Welcome to the Pulmonx Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Laine Morgan at the Gilmartin Group. Laine, please go ahead.

Dorothy Morgan: 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 issued a press release announcing its financial results for the quarter ended June 30, 2023. A copy of the press release is available on Pulmonx’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 provisions of the Private Securities Litigation Reform Act of 1995. 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, those related to our operating trends, commercial strategies and future financial performance; the timing and results of clinical trials; expense management, expectations for hiring; growth in our organization; market opportunity; guidance for revenue; gross margin and operating expenses; commercial expansion and product pipeline for development, 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. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our filings with the Securities and Exchange Commission included in quarterly report on Form 10-Q filed with the SEC on May 8, 2023.

Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call contains time sensitive information and is accurate only as of the live broadcast today, August 2, 2023. Pulmonx 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’ll turn the call over to Glen.

Glendon French: Thanks, Laine. Good afternoon, everyone, and welcome to our second quarter 2023 earnings call. Here with me is Derrick Sung, our Chief Financial Officer. In the second quarter, we executed on our commercial strategy, while continuing to advance our market and geographic expansion initiatives. In Q2, we delivered a new high of $17.2 million in worldwide sales, representing 23% growth over the same period of the prior year driven by another record U.S. performance of $11 million in sales. Given the positive momentum we saw in the second quarter, we are updating our full year 2023 revenue guidance to be in the range of $64 million to $66 million, up from our prior guidance of $63 million to $65 million. Throughout the second quarter, we continued to make progress on our focused U.S. commercial strategy to: one, train hospitals that have the potential to be high performing Zephyr Valve centers; two, facilitate sharing of best practices to existing centers to optimize their Zephyr Valve programs; and three, build local awareness of the benefits of our treatment among COPD physicians and patients.

Increasingly, we are seeing hospitals view their Zephyr Valve programs as areas of strategic investment. In the first half of this year, many of our accounts chose to invest in program coordinators and other resources to allow for additional procedure capacity. In addition, Zephyr Valve hospitals are increasingly implementing routine standard of care protocols to identify and treat patients with severe emphysema, similar to their approach for screening and working up suspected lung cancer patients. For example, a hospital in the Midwest recently changed its protocol to ensure every lung function test is evaluated for hyperinflation and hyperinflated patients with a suspicion of severe emphysema are referred to workup for endobronchial valves.

This has led to substantial growth in patients being identified at this account that might otherwise have been missed in the routine evaluations by other physicians at that system. I’m pleased to report that we are starting to see early evidence that these efforts are translating into increased and productivity. As a reminder, we measure account productivity based on the average number of cases conducted in a given quarter by our active, established Zephyr Valve treating hospitals, which are those that have been performing Zephyr Valve procedures pver the past 4 quarters and have placed a revenue generating order in the current quarter. Over the past year, average account productivity in the U.S. has ranged between 4 and 5 cases per account, and in the second quarter of 2023, average U.S. account productivity trended back up to 4.7 cases per center.

While seasonal trends will drive some variability in this metric from quarter-to-quarter, on average, over time, we expect account productivity to continue to move higher. Meanwhile, U.S. account activity in the second quarter of 2023 was 73%. As a reminder, we define account activity as the percentage of treating accounts that place a revenue generating order in a given quarter. We continue to expect account activity to remain in the mid-70s range as we grow our denominator of treating centers. We also further expanded our commercial footprint, adding 15 new centers in the U.S. in the second quarter of 2023, bringing our total number of U.S. centers to 308. We now expect to end of the year having opened approximately 50 new centers, which is toward the high end of our previously communicated expectation of 40 to 50 new centers this year.

From a geographic expansion perspective, we achieved regulatory approval of our Zephyr Valve in Japan last year and continue to anticipate the establishment of reimbursement in Japan later this year. Once reimbursement is established, we will initiate sales in Japan through a post-market study. As a reminder, though, we anticipate it will take time to grow awareness of this new treatment option. We estimate Japan has approximately 100,000 patients who stand to benefit from our treatment. In our clinical development timeline, we remain on track with our AeriSeal program, which we expect will expand the addressable market of our Zephyr Valve solution for severe emphysema patients with collateral ventilation. I’m happy to announce that during the second quarter we completed enrollment in our CONVERT 1 trial and expect final data to be presented next year.

We are also preparing to launch our next multinational clinical trial, CONVERT 2, and in support of this, we are in the late stage discussions with FDA. Again, results from CONVERT 2 will form the basis of our AeriSeal PMA submission. In summary, our commercial execution is on track. I am confident in our go-forward strategy, our expectations for 2023, and the long-term growth trajectory of our business. With that, I’ll now turn the call over to Derrick to provide a more detailed review of our second quarter results.

Derrick Sung: Thank you, Glen, and good afternoon, everyone. Total worldwide revenue for the 3 months ended June 30, 2023, reached a new quarterly high of $17.2 million, a 23% increase from $14 million in the same period of the prior year. U.S. revenue in the second quarter reached a new record of $11 million, a 28% increase from $8.6 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr Valve therapy. International revenue in the second quarter of 2023 was $6.2 million, a 16% increase from $5.3 million during the same period last year. The overall increase in international sales was driven by growth of Zephyr Valve procedure volumes. Gross margin for the second quarter of 2023 was 74%, compared to 75% in the prior year period, reflecting slightly lower capacity utilization.

We continue to expect gross margin for the full year 2023 to fall within the range of 73% to 74%, trending towards 74% in the back half of the year. Total operating expenses for the second quarter of 2023 were $29.2 million, a 17% increase from $24.8 million in the second quarter of 2022. Non-cash stock-based compensation expense was $5.5 million in the second quarter of 2023. Excluding stock-based compensation expense, total operating expenses in the second quarter of 2023 increased 15% from the same period of the prior year. Looking ahead, we continue to expect operating expenses for the full year 2023 to fall between $112 million to $114 million, inclusive of approximately $22 million of non-cash stock-based compensation expense as we take a disciplined and prudent approach to managing expenses, while continuing to invest to drive growth.

R&D expenses for the second quarter of 2023 were $5.7 million, compared to $3.6 million in the same period of the prior year. The increase was primarily attributable to an increase in clinical and development costs related to our AeriSeal program, as well as an increase in stock-based compensation expense. Sales, general and administrative expenses for the second quarter of 2023 were $23.5 million, compared to $21.2 million in the second quarter of 2022. The increase was attributable to selling costs as we ramped commercial activities as well as an increase in legal and stock-based compensation expenses. Net loss for the second quarter of 2023 was $16.2 million or a loss of $0.43 per share as compared to a net loss of $14.6 million or a loss of $0.40 per share for the same period of the prior year.

An average weighted share count of 37.8 million shares was used to determine loss per share for the second quarter 2023. Adjusted EBITDA loss for the second quarter of 2023 was $10.3 million as compared to $9.8 million in the second quarter of 2022. We ended June 30, 2023 with $147.6 million in cash, cash equivalents, and marketable securities, a decrease of $7.9 million from March 31, 2023. We continue to feel very good about our pathway to cash flow breakeven as we grow our top-line and deliver operating leverage. Finally, turning to our revenue outlook for 2023, given our strong performance in the first half of the year, we are updating our full year 2023 revenue guidance to be in the range of $64 million to $66 million, representing approximately 19% to 23% growth over 2022, and up from our prior guidance of $63 million to $65 million.

Our sales guidance incorporates seasonality in the third quarter, which is typically down sequentially to the second quarter due to the summer holidays. With that, I’d like to thank you for your attention and we will now open up the call for questions. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Rick Wise with Stifel. Your line is now open.

Rick Wise – Stifel Financial Corp.: Hi, good afternoon, Glen. Hi, Derrick. How are you doing? Nice to see the solid quarter and the beaten raise, you keep doing it. It’s nice to see. Maybe starting off I was hoping you could add some extra color on the guide. The new range does clearly seem to imply a sequential step down in the third quarter, and I just wanted to understand how much of this seasonality, I know, you’re always opening new centers and training new docs, and the salesforce gets more productive, and you step up utilization in active accounts. Why not? And I’m not asking this argumentatively. I’m just sort of curious why not sequentially even or higher in the third quarter?

Derrick Sung: Sure, Rick. This is Derrick. Thanks for your question. So, yeah, we are obviously super happy with our performance in the second quarter, right? We’re seeing that increased traction and engagement with our hospital customers exactly as we hoped. And we did raise our overall guidance both the top and bottom range for the year. Now, that said, as you pointed out, we are acutely aware of the summer slowdown, which typically affects our Q3. Last summer, we saw a very pronounced seasonal summer impact, and we have no reason to believe that this year will be any different or perhaps even more substantial. So that has been contemplated into our guide, and that’s the primary reason for our belief that we expect Q3 to be down sequentially.

I think somewhere around the order of 5% to 7% would be what we’d expect, given what we’ve seen in the past and what we’re factoring in. But, that said, we really do expect to see a nice step up back in Q4, and particularly kind of given all the dynamics that we saw, the positive dynamics that we saw in Q2, we expect Q4 to step up nicely. We just don’t want to get ahead of ourselves and we really want to see how the summer plays out this year. So that’s the primary explanation.

Rick Wise – Stifel Financial Corp.: Got you. Glen, maybe for you. There’s been a lot of discussion for several quarters now about patients coming back post-COVID and recovery and, obviously, the intersection with staffing and other lingering issues. But given what seems to be a stable to improving environment, continued recovery, are you noticing, do you feel like in addition to everything else that’s going on? Are you seeing a meaningful or any difference in patient backlogs here? Are patients seeking treatment as you evolve these programs share best practices and build local awareness? Is that making a difference in the pipeline or the patient backlog or, however, you would characterize it?

Glendon French: Yeah. Thanks, Rick. So with regard to our activities, so first of all, COVID to a large extent was behind us coming out of the first quarter of last year. Our focus since then has really been on account efficiency. The patients have always been there all along. I think we’ve talked about in many of the prior calls, 100,000 patients that are engaged with us and with others through social media and through our website and so forth. So the patients are out there and one of the things that we’ve really been focused on and when we popped out of COVID it really became obvious to us. Was that we thought that the accounts had established our treatment as a standard of care in a way that was a little bit different than what was actually the case.

And so we’ve been very much focused on sharing best practices and trying to bring these treating accounts up, the learning curve as it relates to that, and then to make sure that they’re taking full advantage of the opportunity that’s right around them by looking around the hospital and around their hospital system for the patients that are there right now. And that’s been really the primary focus over the last few quarters. And we feel very good about the progress we’ve made. We feel good about the plan. And as we look ahead, we think it provides us with a nice foundation to begin to move those patients into hospitals that are ready to accept them.

Rick Wise – Stifel Financial Corp.: Yeah. And maybe just last for me for now. And I know everybody hates it when analysts ask on these calls about the outlook for the next year. Can’t help myself. As we think about 2024, it seems like the setup is positive for all the reasons you’ve articulated. Are you comfortable with where consensus is? I mean, we’re thinking about 20% growth. You keep delivering it. Maybe talk us through just at a high level, the drivers we might want to be sensitive to as we think about the year ahead. Thanks so much.

Derrick Sung: Yeah. Thanks, Rick. We certainly feel good about what we’ve seen in the first half of this year, right? And as Glen kind of outlined, a lot of what we’re putting in place this year builds that foundation for us to continue to drive growth forward. So we really like what we’ve been seeing relative to how we were hoping to execute relative to our plan this year. Now, next year, it’s obviously premature and we’re not going to comment on guide, et cetera. We do feel good about next year. I feel comfortable where consensus currently sits today, so that’s not something that I would feel a need to move around. But I think, most currently, we like what we’re seeing and the way things are playing out this year, and that’s going to build a strong foundation for us to grow next year.

Rick Wise – Stifel Financial Corp.: I really appreciate that. Thanks to you both. Nice to see the quarter.

Glendon French: Thank you.

Operator: One moment for your next question. And your next question comes from the line of Jason Bednar with Piper Sandler. Your line is now open.

Jason Bednar – Piper Sandler: Hey, good afternoon. I’ll echo Rick’s comments there. Really nice quarter, guys. I actually wanted to – we always focus a lot on the U.S. part of the business, but I also want to look at international here, because that was better as well than what we had been thinking. Can you talk about the procedure, demand improvements you’re seeing in your international markets? Was the strength there broad-based, or was it concentrated in a given market or two?

Glendon French: Well, Jason, as you know, about two-thirds of our business is in the U.S., about one-third is outside the United States. And of that, it’s actually 64-36, I think, year to date. But in any case, it’s moving in that direction. We’ve got 5 countries, including the U.S. that represents over 90% of our global business. If you look across those markets, I think all of them were headed in a positive direction. It looks solid. I think one of them is really set up. The weakest of the 5 is really set up, I think, for a strong back half of the year. So we feel good about that foundation that exists outside the United States.

Jason Bednar – Piper Sandler: Okay. All right. Fair enough. And then, I’ll press you a little bit, Derrick, appreciate the kind of the directional color here on 3Q, but I guess when I do the quick math on implied guidance, then for 4Q, I guess it looks a little lighter than I would have thought, I don’t know if that’s conservatism. But just as we think about that in the context of how you responded to Rick’s question for the 2024 outlook, I guess, just looking for your level of confidence or maybe conservatism that you’ve built into the back half of the year. And, again, I’m kind of coming at this with you guys beat pretty nicely here in the second quarter more than $1 million beat versus consensus. You raised the guide by $1 million, but last quarter, you were already pointing to the upper end of your prior guide. So maybe help me marry all that together, really, as I drill into trying to model out 4Q appropriately?

Derrick Sung: Yeah, I think it’s a great question. Again, I think what really goes into the guidance implied in the back half of the year and kind of front and center of our mind is Q3. And, I think, there is some uncertainty as to how impactful that summer seasonality will be this quarter. We were frankly surprised by the severity of it last year, and at this point, as we into the summer, I don’t think there are any indications that things will be any different. And, I think, there’s potential that it could be worse or better. But certainly that, I think, is some of the uncertainty that we’re factoring in. And, really, again, due to these excess and more pronounced summer vacations that folks appear to be taking both outside the U.S. and inside the U.S. So if you take that into account and you look at Q4, we’ve historically seen a very nice step up between Q3 and Q4.

Q4 has historically been one of the strongest quarters of the year for us, and we would expect that to be the case again this year. So, again, I think we feel good about the fundamentals of our business and the foundation that we’re building, and we look forward to that momentum showing itself through Q4 and into next year. But, again, we just don’t want to get ahead of ourselves.

Jason Bednar – Piper Sandler: Okay. Fair enough. I’ll hop back in the queue. Congrats again.

Operator: One moment for your next question. And your next question comes from the line of Bill Plovanic with Canaccord Genuity. Your line is now open.

Zachary Day – Canaccord Genuity Group Inc.: Hey, guys, it’s Zachary on for Bill today. Thank you for taking the question, and congrats on the quarter. So regarding, Japan, you said that you’re still expecting regulatory approval and expect reimbursement later this year. With that, what do you think the cadence would be on that going into the commercial launch? Do you have an idea of how long the gap between those two events would be? Thank you very much for taking the question.

Glendon French: Thanks, Zach. We got regulatory approval nearly in the back half of last year, and we are anticipating reimbursement in place by the end of this year, and we will begin to commence commercialization within a clinical trial sort of a post-approval trial. So the Japanese government will require us to enroll the first slightly over 100 patients into a post-approval study, so every one of those patients will go in under that. Because we already have approval, we’re in the process of training the physicians right now, and we don’t anticipate there to be long lag before that study commences. And it’ll take on the order of a year to get all those patients in, I think because of the number of accounts that we’re going to be limited to and at which point we’ll be able to expand more broadly.

And that’s in the script that we just were reading from made reference to the idea that we’re going to be increasing awareness over time and then expanding into that substantial opportunity beyond the completion of the enrollment of this post-approval trial.

Zachary Day – Canaccord Genuity Group Inc.: Okay. Great. Thank you very much – sorry, thank you for clearing that up.

Glendon French: Just to be clear, that will be a revenue generating proposition for us, although it’ll just be at a fairly low level.

Zachary Day – Canaccord Genuity Group Inc.: Awesome. Thank you so much.

Glendon French: You bet.

Operator: [Operator Instructions] And your next question comes from the line of Felipe Lamar with Citi. Your line is now open.

Unidentified Analyst: Hey, this is actually Anthony [ph] on for Joanne Wuensch. Thank you for taking our questions. Just another one on Japan. So once you sort of get past this initial year in the trial and you expand more meaningfully, is there anything structurally about the Japanese market that we should be taking into account whether it’s maybe differences in the referral pathway or the workup? And then I just had a follow-up after.

Glendon French: The Japanese – well, it’s that’s a complicated question that you asked very simply, but it’s a very hierarchical market that’s no big mystery, probably the most hierarchical market that I’m aware in the big market in the world. And, therefore, you really need to do things in a specific order, and there’s a price to be paid if you don’t. We have engaged with the thought leaders that are both national and global thought leaders that are based in Japan. We’ve been working together with them through the approval process and the reimbursement process. So we are very confident that we’re working with the right people and that we’re on the right path. And we ultimately expect that this hierarchical nature of the medical community there may in fact play out in our case to our benefit as it relates to communicating out that this is something that is accepted by kind of through Japanese standards and as a consequence may drive interesting sort of adoption curve relative to some of the markets like the U.S. that maybe even aren’t, as one doctor across town doesn’t typically care in the United States, what another doctor across town is doing, whereas in Japan, it’s really all about what the key professor is doing and other experiences that I’ve had have followed.

So we’ll see how that plays out. It’s still to be determined.

Unidentified Analyst: Okay, that makes sense. And then on account activity, I feel like it’s been sort of hovering in the low- to mid-70s for the past few quarters. Is there room for that to push up? Or do you think this mid-70s level is a natural ceiling? Thank you.

Glendon French: Yeah. It has everything to do with how you define it. We’re in the mid-70s. We talk about that’s where we expect to be. I think, literally, we are more or less on top of plus or minus 1% exactly where we’ve been for the last 3 years. And even though the denominator goes up, the activity number sort of stays flat. Now, there is a dynamic here. We’re having more and more people who are – when we first start out everything’s trunk stock, and then we move to stocking accounts after some period of time, so I think we’re getting more and more accounts that are stocking. And in any case, we – so if somebody’s placing an order at the end of one quarter and they don’t place until after the start of the quarter that follows the next quarter.

You’ve got challenges there. If I was to say, for example, to expand this 3-month horizon from 3 months to 6 months, that 75% goes to 85%. I think when people see 75%, they assume that we’ve lost 25% of our customers, and that’s absolutely not the case. I think the flip side to the 85% number is, well what happened to those 15%. And the reality is that much of our business is in academic centers. A lot of these interventional pulmonologists are moving around. We focus on trying to get more than one physician doing the procedure at each of the centers there typically is one who’s the leader if that leader moves from University of Chicago to Columbia Press in New York, then there’s a certain amount of inefficiency in downtime. And I think that movement of these folks is probably the biggest explanation for that 15%.

And then the last little bit, the smallest part of that last 15% is, we probably just didn’t make a good selection of the account. So we’ve got some sort of stuff at the bottom of the barrel that we haven’t scraped out probably made a mistake in picking those accounts, but that’s a very small single-digit proportion of that whole.

Unidentified Analyst: Great. Thank you very much.

Operator: [Operator Instructions] All right. I see no questions in the queue. I will now turn the call back over to Glen French.

Glendon French: Great. We are very pleased with this record quarter that we’ve just reported. We’re confident in the strategy that we have in place, and we’re also very pleased both to raise the bar with regard to our full year revenue expectations and also with our longer-term growth trajectory. So with that, I’d like to thank you all for your time and interest in Pulmonx and wish you all the best.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.