TransMedics Group, Inc. Q2 2026 earnings call

Thank you. Earlier today, TransMedics released financial results for the quarter ended June 30th, 2026. 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 made during this call that can relate to future events, results, or performance, including expectations or predictions, are forward-looking statements.

All forward-looking statements, including, without limitation, our examination of operating trends, the potential commercial opportunity for our products and services, the potential timing, benefits, or outcomes of new clinical programs, and our future financial expectations, which include expectations for growth in our organization and guidance and/or expectations for revenue, gross margins, and operating expenses in 2026 and beyond, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-K filed with the Securities and Exchange Commission on February 24th, 2026, our subsequent SEC filings, and the forward-looking statements included in today's earnings press release, which are available at www.sec.gov and our website at www.transmedics.com. TransMedics disclaims any intention or obligation except as required by law to update or revise any financial projections, expectations, predictions, or forward-looking statements, whether because of new information, future events or developments, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 4th, 2026. With that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Thank you so much, Hannah. Good afternoon, everyone, and thank you for joining TransMedics' second quarter 2026 earnings call. With me today is Gerardo Hernandez, our Chief Financial Officer. Before reviewing our second quarter performance and future catalysts, I want to take a moment to reflect on what we've built at TransMedics and the unparalleled value we are delivering every day for organ transplant patients globally. TransMedics operates a first-in-class, vertically integrated organ transplant platform that rests on four distinct assets. These four assets required several years and substantial capital to create. First asset is the Organ Care System, or OCS technology. To our knowledge, OCS is the only portable multi-organ normothermic perfusion platform commercially available today. Second is the National OCS Program, or NOP, a dedicated national infrastructure for organ procurement, surgical, and clinical services.

Third is TransMedics Transplant Logistics Network, the first transplant-dedicated air and ground logistics network in the United State. Fourth, NOP Connect, the first digital ecosystem that is purpose-built to run the end-to-end transplant workflow with full transparency for every stakeholder involved. Each asset is hard to replicate on its own. Together, they form a substantial moat, and we're not stopping here. We are determined to keep widening that moat. Effective July 1st, 2026, we began offering a new service, which is Donor and Recipient Clinical Screening Coordination Services, allowing transplant programs for the first time to run more of their workflow efficiently on the TransMedics platform. We continue to believe that this TransMedics platform can support approximately 30,000 transplants by 2032, deriving more than $2 billion in top-line annual revenue with a healthy operating profile. Our capital allocation priority has always been, and it is unchanged and deliberate.

We are focused on durable top-line growth ahead of near-term operating leverage. Alongside our second quarter results, I will spend a meaningful portion of today's call on exactly what we are funding over the next 18-24 months, the markets each investment unlocks, and the milestone you should hold us accountable to. Turning to the quarter, second quarter 2026 with the strongest in our history in both revenue and case volume. Here are the highlights. Total revenue of approximately $190 million, up approximately 21% year-over-year and approximately 9% sequentially. Transplant product revenue of $111 million, up approximately 16% year-over-year and approximately 3% sequentially. Service revenue of $79 million, up approximately 29% year-over-year and approximately 19% sequentially. Growth was led by liver, which was up approximately 28% year-over-year and approximately 7% sequentially.

Heart also grew approximately 6% year-over-year and approximately 23% sequentially, and we expect heart to continue to accelerate in the fourth quarter and beyond as we unlock ENHANCE Heart Part B. TransMedics Logistics delivered approximately $41 million, up approximately 39% year-over-year and approximately 30% sequentially. This growth is the clearest evidence yet that vertical integration of logistics is both a growth engine and a structural differentiator for TransMedics. It is precisely why we are replicating this network outside of the United State. On average, we covered approximately 86% of NOP mission requiring air transport in the quarter, up from 82% in the first quarter. This resulted in improved operating efficiency. Taking share in this highly competitive transplant logistics market is the unequaled real cost efficiency to transplant centers relative to the other transplant logistics providers in the space.

Adjusted income from operation of approximately $25.8 million, or approximately 14% of revenue, delivered while continuing to fund our growth initiatives. We ended the quarter with approximately $473 million in cash and cash equivalent, giving us great confidence in our ability to self-fund our growth investment from the balance sheet and operations. Finally, on July 1st, 2026, we closed our strategic investment in PAD Aviation in Germany, the first step towards establishing TransMedics Aviation Europe and building a Pan-European transplant logistics network modeled on our U.S. network that we discussed in the quarter. We will discuss the implication of this growth investment later on this call.

In short, second quarter strength was driven by strong growth across OCS case volume and clinical services, it was achieved with minimal contribution from ENHANCE Part B or DENOVO, which we expect to begin contribute meaningfully late in the fourth quarter and definitely into 2027. Let me shift gears and address an important strategic topic. As we all know, our stock has been volatile since our last call as investors weigh our growth investment against near-term operating leverage. We take this matter very seriously, I want to address it directly with data on both the size of the opportunities we're investing in and our track record of converting investment into significant results and significant shareholder value.

As I mentioned earlier, our technology, service infrastructure, logistics network, and digital platform well positions TransMedics to potentially surpass $2 billion in annual revenue with a strong operating profile at scale. Four initiatives underpin that path. Each has a defined market, a defined investment window, and a defined milestone. First, heart and Lung growth to try to replicate the Liver trajectory. ENHANCE Part B targets a U.S. heart segment where we hold no clinical indications today. This segment represents approximately 2,200 DBD heart transplanted annually in the U.S., with roughly four hours of preservation time. We designed ENHANCE Part B to serve that segment in two distinct ways. The first is using the OCS for its improved preservation capabilities and enhance function ex vivo. Second is using CHOPS, a lower-cost technology alternative for transplant programs who may be focusing on controlling cost.

DENOVO is our focused effort to reestablish or frankly resurrect the Lung perfusion market in the U.S. and broaden OCS Lung adoption. Together, ENHANCE and DENOVO gives TransMedics access to a conservatively estimated 2,000-5,000 incremental U.S. heart and Lung cases annually. This could materially expand our addressable U.S. opportunity from existing product line. As it relates to execution milestone, the IDE supplement incorporating CHOPS, which is the TransMedics Controlled Hypothermic Organ Preservation System into the ENHANCE trial, has been submitted and is currently under FDA review. We expect it to be approved by late Q3 or early fourth quarter, with the Lung IDE to follow shortly thereafter. Second initiative is the kidney. This will enable us to access the largest transplant market segment in the U.S. and around the world. Let me give you the details. The U.S. performs more than 21,000 deceased kidney transplants annually.

In 2024, approximately 9,200 additional deceased donor kidneys were recovered and never transplanted, largely because of limitations of cold storage preservation. At any given time, approximately 100,000 patients sit on the U.S. kidney waiting list. More than 131,000 new ESRD cases are diagnosed each year. The estimated CMS cost of the waiting list alone is approximately $10 billion annually in the U.S. Simply stated, the demand for better donor kidney utilization is enormous and is a matter of national interest for CMS and for end-stage renal failure patients. Now let's shift gears to post-transplant outcomes in kidney transplant. Post-transplant outcomes are further constrained by delayed graft function, which occurs in 26%-50% of U.S. kidney recipients, requiring the patients to go back on dialysis at a significant cost and morbidity. Ischemia and reperfusion preservation injuries are the primary cause of DGF post kidney transplants.

The estimated incremental cost is approximately $25,000-$45,000 per DGF case in the U.S. To summarize, the kidney opportunity is massive, and the clinical need is real and its associated costs are significant. Now let me explain how OCS Kidney could address these issues comprehensively. OCS Kidney is being designed as the first portable normothermic oxygenated perfusion system for kidney transplant to significantly reduce ischemia reperfusion injury on the donor kidney. In addition, OCS Kidney is designed to include online functional assessment capabilities. We believe that OCS Kidney has the potential to significantly increase donor kidney utilization and significantly reduce the incidence of DGF post-transplantation, which will drive significant cost efficiencies to CMS. We're building OCS Kidney system on our next-gen platform, which is Gen 3.0, which adds meaningful scale and operating leverage across the business.

This is the single largest addressable segment available to us in organ transplantation in the U.S. and around the world. In terms of milestones, the development program is fully underway, and we have begun pre-IDE discussions with FDA to define the best path for the IDE to work on it collaboratively with the agency. In fact, we had our first pre-IDE sub-meeting, pre-sub meeting with the FDA this morning. We're targeting first clinical experience later in 2027, and the program is now entering engineering and manufacturing verification and validation to prepare for the first in-human use. Global demand for OCS Kidney is significant, and we are evaluating potential options to capitalize on OUS demand in parallel to our U.S. IDE. The third initiative is international expansion to expand our total addressable market.

As we've discussed, we are replicating the successful U.S. NOP and logistics model in Europe, starting with Italy, where we have secured national reimbursement for machine perfusion and services that should take effect later this year or early 2027. We're actively engaged in multiple regional transplant logistics tenders in Italy today, and the recent PAD Aviation investment was the enabling step that makes us eligible to compete for these transplant logistics tenders across Italy and across Europe. We are also in discussions with several additional European countries on NOP and logistics. The opportunity in Europe leverages capabilities we've already built, materially expanding our addressable market, extends our life-saving impact to European transplant patients, and we view it as a meaningful growth catalyst for 2027 and beyond. Finally, building the technology platform to scale globally and drive significant operating leverage. That is next-gen or OCS Gen 3.0.

Thank you, Waleed. Good afternoon, everybody. I am pleased to share TransMedics' second quarter 2026 results. A supplemental slide presentation with additional detail is available in the Investors sections of our website. The second quarter delivered strong revenue growth, sequential gross margin improvement, and an adjusted operating margin of 13.6%. Our results reflect continued strength in the business together with increased investment in R&D and the infrastructure required to support future growth. Today, I will review our second quarter financial performance, the key drivers of operating expenses, and our updated full-year outlook. As introduced last quarter, we report several non-GAAP measures, including adjusted R&D, SG&A, operating expenses, income from operations, operating margin, net income and diluted earnings per share.

We believe these measures provide both management and investors with greater visibility into the underlying performance of the business, particularly as we incur certain discrete expenses that may affect comparability between periods. Full reconciliations are included in the supplemental materials. Turning to our second quarter financial performance. Total revenue was approximately $190 million, up 21% year-over-year and 9% sequentially, marking the highest quarterly revenue in our history. U.S. transplant revenue was approximately $184 million, up 21% year-over-year and 10% sequentially. By organ, liver contribute with approximately $148 million, heart approximately $33 million, and lung approximately $2 million. International revenue was approximately $5 million, up 26% year-over-year, reflecting continued progress as we expand our presence in Europe. We remain in the early innings of our European growth story, and as we continue to build scale, we expect some quarterly variability.

Product revenue was approximately $111 million, up 16% year-over-year and 3% sequentially, led by liver. Service revenue was approximately $79 million, up 29% year-over-year and 19% sequentially. Service revenue represented 41% of total revenue. The increase was primarily driven by broader adoption of TransMedics logistics and pricing adjustments to offset higher fuel cost. Total gross margin was 59.6%, up approximately 140 basis points sequentially and down approximately 180 basis points year-over-year. The sequential improvement was driven primarily by service margin, which increased from approximately 27% in the first quarter of 2026 to 35% in the second quarter, reflecting higher fleet utilization, improved operating efficiency, and continued optimization of our service offerings. Product gross margin was 77%, broadly stable sequentially.

The year-over-year decline primarily reflects the higher mix of service revenue and certain temporary product cost pressures, including inventory provisioning and trial-related solution cost. These factors were partially offset by improved performance in TransMedics logistics and continued operating efficiencies. We expect some normalization in service margin during the second half while remaining above historical levels. Adjusted operating expenses were $87 million, up approximately 46% year-over-year and approximately 5% sequentially. OCS Kidney, next-generation OCS, and our ENHANCE and DENOVO clinical programs accounted for approximately half of the year-over-year increase for about $14 million. Investments in our new headquarters and our new disposable manufacturing facility in Mirandola, Italy, represented another approximately 20% of the incremental investment for about $5 million. The Mirandola investment is an important step in strengthening our supply chain through greater vertical integration.

The sequential increase was concentrated in these strategic growth programs. Excluding these investments, operating expenses declined sequentially, demonstrating continued discipline across the broader cost base. Adjusted R&D was approximately $32 million, up approximately 99% year-over-year, primarily driven by investment in the strategic growth programs. Adjusted SG&A was approximately $55.8 million, up approximately 27% year-over-year and down approximately 4% sequentially. The year-over-year increase primarily reflects our Somerville headquarters and investment in NOP network, IT infrastructure, and international expansion. Sequentially, SG&A declined as non-recurring payroll-related costs recorded in the first quarter did not repeat and consulting spending decreased following the completion of several projects. For the second half, we expect adjusted operating expenses for the existing TransMedics business to be broadly in line with the first half with R&D remaining elevated and SG&A tightly managed.

Adjusted income from operations was $25.8 million, representing an adjusted operating margin of 13.6%. Most of the year-over-year decline reflects the planned increase in strategic investment, with the balance attributable to the gross margin factors discussed earlier. Adjusted net income was $16.2 million, and adjusted diluted earnings per share was $0.44. Diluted weighted average number of shares were approximately 40.7 million. For modeling purposes, interest expense was $7.2 million in the quarter, including approximately $3.8 million related to the finance lease for our new Somerville headquarters. We expect headquarters-related interest expense of approximately $15.3 million for the full year and total interest expense approximately $29 million, partially offset by approximately $12 million of interest income. Our effective tax rate was 24.3% in the quarter, and we expect approximately 26% for the full year.

We ended the quarter with $473 million in cash and cash equivalents and approximately $18 million in restricted cash, primarily related to a headquarters lease, which is reported separately. Now let me turn to PAD Aviation. The transaction closed on July 1st, 2026, and PAD will be consolidated in our financial statements beginning in the third quarter. PAD's existing third-party charter business will be reported within non-OCS revenue. Future transplant logistics revenue generated by PAD in support of our European platform will be reported within service revenue consistent with our U.S. transplant logistics business. While we understand PAD's historical performance and its charter business, we have not yet established an operating track record under TransMedics to provide a standalone estimate with the level of confidence and precision we expect from our guidance.

PAD is an important strategic investment that provides the aviation infrastructure required to support our European transplant logistics platform. As we integrate the business and increase the utilization of transplant missions over time, we expect its financial profile to improve. In the near term, however, its initial consolidation will be dilutive to both gross margin and operating margin beginning in the third quarter. Now turning to our 2026 outlook. As Waleed noted, excluding the impact of PAD Aviation, we are raising the lower end of our full year 2026 revenue guidance to a range of $737 million-$757 million, representing growth of approximately 22%-25% compared to 2025. This guidance assumes no incremental revenue from ENHANCE Part B and DENOVO.

We are confident in our updated guidance because, at the midpoint, it reflects a second-half sequential growth pattern broadly consistent with the average observed over the past two years. For the second half of 2026, we expect gross margin, excluding the impact of PAD Aviation, of approximately 59%. Looking beyond 2026 and excluding PAD Aviation, we expect gross margin to remain broadly around current levels over the next two to three years as we continue to invest in international expansion. Over time, greater scale and utilization across our international platform, together with efficiencies designed into OCS Kidney and next-generation OCS, should support a sustainable gross margin profile of approximately 60% with potential for further improvement. In terms of operating margin, our prior expectation was for a full-year adjusted operating margin of approximately 16%, or about 250 basis points below our 2025 level of 18.5%.

We now expect full-year adjusted operating margin, excluding the impact of PAD Aviation, of approximately 12.5%-14%. The range primarily reflects potential variability in revenue performance, while the reduction from our prior expectation primarily reflects the higher planned investment in OCS Kidney. This represents a deliberate acceleration of key strategic growth programs rather than a broad-based expansion of our overhead structure. Our capital allocation priorities remain focused on long-term value creation, supporting innovation across our technology and clinical pipeline, strengthening our NOP and international platform, and building the systems and infrastructure required to support scale. We also continue to evaluate selective strategic opportunities that can further strengthen and expand our platform subject to disciplined strategic and financial criteria. To summarize, the second quarter delivered record revenue, sequential gross margin improvement, and material higher service profitability.

We raised the lower end of our full-year revenue guidance, excluding PAD Aviation, to $737 million-$757 million. We expect full-year adjusted operating margin, excluding PAD Aviation, of approximately 12.5%-14% while maintaining a strong liquidity position. With that, I'll turn the call over to Waleed for closing remarks.

Thank you so much, Gerardo. Overall, we're pleased with our second quarter performance and, more importantly, confident in what lies ahead as we execute against the growth initiatives we outlined today. Please allow me to be direct about how we see our business and how to model TransMedics. We are building TransMedics to be a growth business in the near, mid, and long term. Operating margin will vary quarter to quarter with the pace of the investment required to fuel that growth. We are equally committed to delivering a strong operating profile at scale, and we will report progress against these initiatives every quarter. On execution, our track record speaks for itself. A few years ago, our plan to vertically integrate logistics was widely questioned. Today, TransMedics Transplant Logistics is a significant growth driver and operational differentiator for our business.

Importantly, TransMedics is approaching an approximately $800 million annualized revenue run rate, yet with substantial growth initiatives still in front of us and ahead of us. Finally, we remain grounded and humbled in the life-saving impact of the OCS technology, our NOP services, our world-class team, and committed to our mission of expanding access and improving clinical outcomes for patients in need of organ transplantation worldwide. With that, I will turn the call over to the operator for questions. Operator?