Logo of jester cap with thought bubble.

Image source: The Motley Fool.

DATE

Tuesday, Aug. 4, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

  • President and Chief Executive Officer - Waleed Hassanein
  • Chief Financial Officer - Gerardo Hernandez

TAKEAWAYS

  • Total Revenue -- $189.9 million, representing 21% growth year over year driven by increased utilization of the Organ Care System (OCS) in liver and heart transplants.
  • Product Revenue -- $111.2 million, up 16% year over year and 3% sequentially, reflecting growth in the liver transplant segment.
  • Service Revenue -- $78.8 million, up 29% year over year and 19% sequentially due to broader adoption of TransMedics Logistics and pricing adjustments to offset higher fuel costs.
  • Liver Segment Revenue -- $148 million, growing 28% year over year and 7% sequentially.
  • Heart Segment Revenue -- $33 million, representing 6% growth year over year and a 23% sequential increase.
  • Logistics Revenue -- $41 million, up 39% year over year and 30% sequentially, demonstrating the impact of vertical integration in air and ground transport.
  • International Revenue -- $5 million, a 26% year-over-year increase reflecting initial expansion efforts in Europe.
  • Total Gross Margin -- 60%, compared to 61% in the prior-year period due to a higher mix of service revenue and temporary product cost pressures.
  • Service Gross Margin -- 35%, improving from 27% in the first quarter of 2026 due to higher fleet utilization and improved operating efficiency.
  • Product Gross Margin -- 77%, remaining stable sequentially while absorbing certain inventory provisioning and trial-related costs.
  • Adjusted Operating Expenses -- $87 million, up 46% year over year primarily due to investments in OCS Kidney, NextGen OCS, and clinical programs.
  • Adjusted Research and Development -- $32 million, up 99% year over year, focused on the development of the OCS Kidney and next-generation OCS platform.
  • Adjusted Selling, General and Administrative -- $55.8 million, representing 27% growth year over year driven by headquarters relocation and international expansion.
  • Adjusted Operating Margin -- 13.6%, declining from 23.2% in the prior year as the company prioritized strategic growth investments over near-term leverage.
  • Net Income -- $14.7 million, resulting in $0.41 per diluted share, compared to $34.9 million or $0.92 per share in the second quarter of 2025.
  • Cash and Cash Equivalents -- $472.7 million as of June 30, 2026, which management indicated is sufficient to self-fund planned growth initiatives.
  • Full-Year Revenue Guidance -- Raised to a range of $737 million to $757 million, representing 22% to 25% annual growth, excluding contributions from PAD Aviation.
  • Adjusted Operating Margin Guidance -- 12.5% to 14%, adjusted downward from a previous estimate of 16% to reflect accelerated investment in the kidney program.
  • Air Logistics Coverage -- 86% of National OCS Program (NOP) missions requiring air transport were covered by the internal fleet, up from 82% in the first quarter.
  • Kidney Market Opportunity -- Management identified more than 21,000 deceased kidney transplants annually in the U.S., with approximately 9,200 recovered kidneys never transplanted.
  • Delayed Graft Function (DGF) Costs -- DGF affects 26% to 50% of U.S. kidney recipients, adding an estimated $25,000 to $45,000 in cost per case.
  • Target Annual Revenue -- Management projected the platform could support approximately 30,000 transplants by 2032, driving more than $2 billion in annual top-line revenue.
  • Infrastructure Investment -- Approximately $5 million was spent on the new Somerville headquarters and a disposable manufacturing facility in Mirandola, Italy.
  • Headquarter Interest Expense -- Expected to be approximately $15.3 million for the full year, with total interest expense of approximately $29 million.
  • Effective Tax Rate -- 24.3% in the second quarter, with a full-year expectation of approximately 26%.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

  • Hernandez stated, "initial consolidation [of PAD Aviation] will be dilutive to both gross margin and operating margin beginning in the third quarter," reflecting near-term integration costs of the European aviation platform.
  • Hassanein noted that "Q3 is a traditionally seasonally soft quarter for transplant procedure volume," which may impact short-term revenue performance.

SUMMARY

Management at **TransMedics Group, Inc.** (TMDX +1.07%) reported record quarterly revenue and highlighted a strategic prioritization of growth over near-term operating leverage. The company's vertically integrated model, which combines organ care technology with a dedicated logistics network, showed increased efficiency through higher internal fleet utilization and expanding service margins. Four primary initiatives were identified as long-term growth drivers: expanding the heart and lung segments through the ENHANCE and DENOVO clinical programs, entering the large-scale kidney transplant market, replicating the U.S. logistics model in Europe, and developing the NextGen OCS Gen 3.0 platform. The company confirmed that it remains focused on building a durable infrastructure to support a significant increase in annual transplant volumes by 2032.

  • CEO Hassanein emphasized the company's commitment to expansion, stating, "TransMedics is and remains a growth-oriented business. We are funding these 4 growth initiatives over the next 18 to 24 months precisely because they are what carries us to approximately 30,000-plus transplants by 2032."
  • The company launched a new donor and recipient clinical screening coordination service on July 1, 2026, aimed at streamlining the end-to-end transplant workflow for hospital programs.
  • July 2026 was reported as the highest aviation month in the company's history, although management remains cautious about typical seasonal softening in August.
  • The acquisition of PAD Aviation provides an essential aviation license for European operations, enabling the company to compete for regional transplant logistics tenders in Italy and other EU nations.
  • OCS Kidney is being developed as a portable normothermic oxygenated perfusion system, with management targeting the first clinical experience in 2027 following pre-IDE discussions with the FDA.
  • CFO Hernandez attributed the logistics growth to market share gains, noting, "The double-shifting [of aircraft] gave us significant operating leverage."
  • Management secured national reimbursement for machine perfusion and services in Italy, with regional budgets expected to be disbursed by late 2026 or early 2027.

INDUSTRY GLOSSARY

  • OCS (Organ Care System): A portable multi-organ normothermic perfusion platform designed to preserve and optimize donor organs outside the human body.
  • NOP (National OCS Program): A service infrastructure providing organ procurement, surgical support, and clinical services for transplant centers.
  • DGF (Delayed Graft Function): A condition where a transplanted organ does not function immediately, often requiring dialysis in kidney recipients.
  • CHOPS (Controlled Hypothermic Organ Preservation System): A lower-cost technology alternative for organ preservation integrated into clinical trials.
  • IDE (Investigational Device Exemption): An FDA approval that allows a medical device to be used in a clinical study to collect safety and effectiveness data.
  • ESRD (End-Stage Renal Disease): The final stage of chronic kidney disease where the kidneys no longer function sufficiently to sustain life.
  • DBD (Donation after Brain Death): Organ donation from a patient who has been declared legally dead based on the irreversible loss of all brain function.
  • DCD (Donation after Circulatory Death): Organ donation from a patient whose death is declared following the irreversible cessation of circulatory and respiratory function.

Full Conference Call Transcript

Operator: Good afternoon, and welcome to TransMedics Second Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Hannah Jeffrey from The Gilmartin Group for a few introductory comments. Hannah Jeffrey Thank you. Earlier today, TransMedics released financial results for the quarter ended June 30, 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 24, 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 4, 2026.

With that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer.

Waleed Hassanein: 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 4 distinct assets. These 4 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 States. And 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 1, 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, driving 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.

So 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 to 24 months, the markets each investment unlocks and the milestone you should hold us accountable to. Turning to the quarter. Second quarter 2026 was 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 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 States. 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 in operating efficiency. Taking share in this highly competitive transplant logistics market is [Technical Difficulty] real cost efficiency to transplant centers relative to the other transplant logistics providers in the States. Adjusted income from operations 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 equivalents, giving us great confidence in our ability to self-fund our growth investment from the balance sheet and operations.

And finally, on July 1, 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, and it was achieved with minimal contribution from ENHANCE Part B or DENOVO, which we expect to begin to contribute meaningfully late in the fourth quarter and definitely into 2027. Now 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, and 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 4 hours of preservation time. We designed ENHANCE Part B to serve that segment in 2 distinct ways. The first is using the OCS for its improved preservation capabilities and enhanced 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 to 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% to 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 transplant. The estimated incremental cost is approximately $25,000 to $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 and 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 meeting -- pre-sub meeting with the FDA this morning. We are 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, extend 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 NextGen or OCS Gen 3.0.

Gen 3.0 is a complete redesign of the OCS platform, engineered from the ground up to deliver significant operating leverage and supply chain independence. In addition, it is designed to be highly autonomous and with cloud-based remote monitoring and control capability to enable scaling of clinical usage and to support operating capacity of 30,000 transplants and beyond globally by 2032. Now let me conclude by a review of our execution track record. Over the last 4 years, TransMedics has consistently outperformed growth expectations, with the few exceptions largely driven by seasonal softness while at greater scale.

We have also consistently delivered strong bottom line performance despite our hyper focus on top line growth and deliberate deployment of capital to build our unparalleled platform. With that as a background, please let me state plainly for the record, TransMedics is and remains a growth-oriented business. Please allow me to repeat it again. TransMedics is and remains a growth-oriented business. We are funding these 4 growth initiatives over the next 18 to 24 months precisely because they are what carries us to approximately 30,000-plus transplants by 2032 and more than $2 billion in top line revenue. Turning to guidance.

Recognizing that we are early in Q3, which is a traditionally seasonally soft quarter for transplant procedure volume, and early in the integration path for PAD Aviation into our European operation, we are raising the low end of our full year 2026 revenue guidance to a range of $737 million to $757 million, representing 22% to 25% growth over 2025. Importantly, this guidance assumes no revenue contribution from PAD Aviation investment and no meaningful incremental revenue from ENHANCE Part B or DENOVO clinical programs. With that, let me turn the call over to Gerardo to review our second quarter financial results in detail.

Gerardo Hernandez: 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 section 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. Now 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 contributed 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 costs. 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 costs. 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 or 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 nonrecurring 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 headquarter-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 headquarters' lease, which is reported separately. Now let me turn to PAD Aviation. The transaction closed in July 1, 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 stand-alone 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 to $757 million, representing growth of approximately 22% to 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 2 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 2 to 3 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% to 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 build 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 materially higher service profitability.

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

Waleed Hassanein: 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 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?

Operator: Your first question comes from Allen Gong with JPMorgan.

K. Gong: I just wanted to start off with your service performance in the quarter, definitely, I think, stronger than we had been expecting. And the growth outpaced your disposables business even ahead of this new initiative that you're launching on the service side. So I know, like, I think you had talked to some increase in dry runs in the quarter. But how should we think about the drivers of that increase? And what are you seeing so far in the third quarter when it comes to that dry run dynamic or any others?

Waleed Hassanein: Thank you, Allen. We have never discussed increase in dry run pace. We don't see an increase in dry run rate. We didn't see it in Q2. We didn't see it in Q3. And I'll leave it at that.

K. Gong: I guess then, like, what drove that increase in service revenues, right? Because I think like maybe naively that disposables and service should go -- grow pretty hand-in-hand given -- especially on the aviation side, you service an increased percentage of your flights using NOP. So that would increase it a bit, but I think the growth disparity is a little bit stark there. So what drove that increase in service revenues kind of above product revenues?

Waleed Hassanein: Gaining market share in logistics, gaining a lot of efficiency in our logistics, improving our margins, pricing adjustment to buffer against the increase in costs, new centers. So that's -- these all combined lead to that picture.

Operator: Your next question comes from Josh Jennings with TD Cowen.

Joshua Jennings: Congratulations on a strong quarter. It seems that the third quarter is starting off strong, too, looking at some of the transplant -- post transplant volume data. But maybe -- and that's a continuation in the back half of 2Q. Maybe help us think about the market growth dynamics that you're seeing in U.S. heart, lung, and liver transplant volumes and what's driving the acceleration if that is, in fact, occurring?

Waleed Hassanein: Thank you, Josh. We agree we started Q3 very, very strong. In fact, I mean, it's not a secret. It's published on Twitter every day. July was the highest aviation month for the business. But July is not Q3. And we are entering into August, and we all know what happens in August. So we're encouraged. As I said, there are new centers coming on board. There are new initiatives that are driving growth, plus we're gaining market share in our logistics and clinical services. So we are cautiously optimistic about Q3. We need to see how the rest of the quarter unfolds before we formulate an opinion. We're focusing on our part of the equation, Josh.

We're driving more utilization, more cases, more services. What happened on the national level, again, we keep track of it, but our primary focus is growing our own adoption and our own portion of the market, so. And we feel we're -- the team is doing a great job at that. But it's early in Q3, Josh, I don't want anybody on the call to think that Q3 this year is going to be significantly different until we see it significantly different. So far, we had a great July. But again, we still have 2 more months to go. And August, we're starting to see some kind of -- we know what happened in August.

People take vacations and centers go hunker down. So we have to wait and see.

Joshua Jennings: Understood. That makes sense. Maybe just one follow-up just on the controlled hypothermic organ preservation system or CHOPS and I'm not sure if you -- if I missed this, but any update just on the 510(k) pathway? And maybe help us think about when you could have clearance in hand and just the commercial opportunity outside of the benefit you received from CHOPS being included in ENHANCE Part B and DENOVO, but just the overall commercial opportunity, help frame that up for us.

Waleed Hassanein: Thank you, Josh. Josh, as you know, we like to walk before we run, before we sprint. So right now, the focus is getting the IDE approval to get -- to unlock the trial. The next frontier for us will be the 510(k). I think realistically speaking, this is H1 2027 horizon for us. As far as the opportunities that it unlocks, as I stated earlier, at least, at least 2,200 annual cases in the U.S. DBD hearts that are done with approximately 4 hours of preservation. So that's why we framed it as such in the prepared remarks.

Joshua Jennings: And can it be used in other indications? Or are you focusing on heart first, Waleed? Sorry for the...

Waleed Hassanein: Again, we don't talk about our active discussions with FDA, and we're actively discussing all this with FDA. But when you look at what CHOPS does, there's no reason why we shouldn't have indications beyond heart. But I'll leave it at that.

Operator: Your next question comes from Bill Plovanic with Canaccord.

William Plovanic: Waleed, first question is, I was wondering if you could unpack the statement that you're adding donor and recipient screening services starting July 1. I'm trying to understand the potential impact from that from a volume standpoint, from a revenue standpoint, providing that service, what does that do for the customers? And how does that impact TransMedics?

Waleed Hassanein: Thank you, Bill. We've been talking about this for a long time. It's a natural kind of progression to what we do. I'll focus on why we're doing it rather than what the centers could do because that's what I can control. We're doing it because we've always stated that the transplant market or the transplant workflow is highly complex and highly unorganized. There's many cooks in the kitchen. And we always believed that harmonizing that workflow into one streamline of services, technology, transparency, accessibility could be a catalyst for what TransMedics is doing. So we launched that service. We signed up a major health care system in Boston.

We are going to experiment with that, pilot that over the next few quarters. And the hope is, one, the center would see the value, and we would see the potential impact. It's early, but we're excited about this initiative. It gives us visibility to the national donor pool that's coming for allocation. It allows us to support these centers and give them access to our platforms, whether digital platforms, OCS platforms, logistics services and it streamlined the process for them to drive more efficiency and more transplants.

William Plovanic: And then just following up on the earlier question regarding -- I'm sorry. I lost my train of thought there. The ENHANCE heart trial and the DENOVO lung trials, these have been delayed and they kind of continue to get delayed. I don't know if you could characterize the conversations with the FDA? Or what gives you confidence that we'll be able to at least start the DENOVO lung before year-end and get into the ENHANCE Part B early next year, if I'm accurately hearing you? What gives you confidence that we're actually more towards the end of the goal line with those IDEs rather than kind of stuck in the neutral here?

Waleed Hassanein: Thank you, Bill. Listen, again, there's a reason why we don't comment on our discussions with FDA. FDA owns the time line. We are working collaboratively with them. We believe we have done everything that we've been asked to do. I'll leave it at that. The heart is ahead of the lung right now, and it has been to-date. So that's why we are predicting that once we gain visibility on the IDE for heart, we will use that as a stepping stone to get lung IDE amendment approved. We have to remind the audience that what I'm talking about is not the IDE approval per se.

I mean, everybody knows that IDE amendment is anywhere between 30 and 60 days. The problem is after that, we need to go back to the centers, notified IRBs and I'm focusing on getting actual cases done with that approval. So I'm not necessarily focusing on FDA approval per se. I'm focusing on the tangible outcome, the impact on our quarterly print, which is doing cases with that IDE.

Operator: Your next question comes from Ryan Daniels with William Blair.

Matthew Mardula: This is Matthew Mardula on for Ryan. And I kind of want to follow-up on the previous question but ask it in a different way. Can you give us an update on the percentage or amount of the DENOVO, ENHANCE clinical trials that have been completed so far? I know in your prepared remarks, you discussed a minimal contribution from ENHANCE Part B and DENOVO in Q2. But any update on that contribution and then just overall completion of the clinical trials so far?

Waleed Hassanein: Sure. Matt, thank you for the question. I would -- as I stated several times, I believe, over the last few months, ENHANCE Part B will be completed before year-end. There's no question in our mind. But ENHANCE Part A -- I'm sorry, Part A, I apologize if I stated these. ENHANCE Part A is going to be completed before year-end this year. There's no doubt about it. The slow to kick into full gear is Part B for the heart and DENOVO. We've done a handful of cases in each, nothing really to hang our hat on. So that's why I said there was no meaningful contribution in Q2 from these two.

The only way we can really put that to test is by getting that IDE approval -- IDE supplement approved and giving the center the freedom to use a control arm that is not hampered by competitive dynamics. So we expect that once it happens, we expect, we hope for rapid adoption and rapid enrollment. And again, we're keeping our focus around 12 to 18 months from initiation of the enrollment of the study. So we're still within the bounds of 2027, but we need to start seeing uptake, and we need to get that IDE approved in the time lines we outlined.

Matthew Mardula: Perfect. And one very quick follow-up. Regarding the international growth, you talked about securing reimbursement for both machine perfusion and services internationally that should take effect later this year or early 2027. It sounds like initial conversations internationally are going better than expectations. Can you give us some insights into that growth internationally? I know it's still early, but any big picture ideas as well as with the kind of tenders and contracts in Italy as well as expanding outside of Italy?

Waleed Hassanein: Matt, that's an important question, but I want to kindly correct the question. I did not say that we secured reimbursement for the product and service across Europe. I said we secured a budget in Italy, only in Italy. The budget that I'm referring to is in Italy. And that's where we -- the regional budgets have been ratified in Q2, and we expect going through the bureaucratic steps to get that budget disbursed is underway in Italy, and we hope to get through that bureaucratic process by end of this year, beginning of next. I'm referring specifically on Italy. All the other dynamics across Europe are targeting or prioritizing countries that already have budgets for reimbursement.

For example, Netherlands, France, the U.K., those have budgets already approved. What we're doing, however, is we're expanding our outreach to compete not just for the technology and the transplant, but also for logistics, which their budgets are large, already approved and already at the national tender level. That's what we are competing for. And that's where we see a near-term potential growth opportunity as a first step towards broader OCS NOP growth across Europe.

Operator: Your next question comes from Matt O'Brien with Piper Sandler.

Samantha Munoz: This is Sam on for Matt. I guess we -- still waiting on the CMS final rule regarding OPO recertification. How are you planning for the potential opportunity here? And what do you think TransMedics' role would look like and the benefit to TransMedics if it could become an OPO?

Waleed Hassanein: Thank you, Sam. We are waiting exactly like everybody else. So we hope that decision will be made sometime in the second half of this year. We are waiting ready and able if we're fortunate to be given the opportunity to compete for as many DSAs as CMS would allow us to participate at. But until that happens, we have to continue to do what we're doing. We see 2 significant benefits.

The first is our ability to leverage technology, clinical leadership and clinical expertise to expand the donor pool and to increase the utilization of the existing donor pool using OCS technology, reduce the overall cost by eliminating, frankly, costly and unnecessary excessive procedures that really hasn't demonstrated its ability to increase organ supply like NRP. But again, if that doesn't happen, we will continue to operate in the same mode that we're operating in. And all of -- everything we discussed today from a growth opportunities, you notice does not include us becoming an OPO. So because this is a binary decision. It's either going to happen or it's not going to happen.

So that's why we can't count on it until it happens.

Samantha Munoz: Okay. Great. And then also, I want to continue the conversation on the really strong flight performance that's happened in the past few months. I know you mentioned market share gains. Could you talk a little bit about how double shifting the aircraft is going? And how durable do you think this momentum is in the flight performance?

Waleed Hassanein: Thank you, Sam. I think the growth is primarily market share gain. The double-shifting is what improved the margin. So there are 2 different things. The growth in revenue is primarily market share gain. And other vendors reported earlier today that they lost a major account. Where do you think that major account went to? It came to us. The double-shifting gave us significant operating leverage, so. How durable it is? We think it's durable. And again, we will let the print speak for itself.

Operator: Your next question comes from Patrick Wood with UBS. Patrick Wood Given the time, I'll just keep it to one. Curious about Germany and what it was that drove you, I guess, as the next steps to be looking at that market. I think they're kind of unique in that DCD isn't really on the table at the moment. What was it about Germany, just size and scale of patients? Why was that the right next move after Italy?

Waleed Hassanein: Patrick, first, congratulations on the new role, and thank you for the question. I want to clarify one point. We are not in Germany today. We made a major strategic investment in PAD Aviation in Paderborn, Germany because of its central location in Europe, we can access any potential European country or donor site within 2 hours of flight from Paderborn. That's what we make the investment in, but we are not active in Germany because of lack of reimbursement. We're still negotiating with the German reimbursement authority. And also, as you know, there's no DCD donation in Germany.

So it's a complex market, and we are actively engaged there, but we don't see them as a near-term growth catalyst for us.

Operator: Your next question comes from Daniel Markowitz with Evercore ISI.

Daniel Markowitz: I was curious on the consulting fees in the first half and some of the findings of that work. So sort of asking a different way with what some of the folks before me have asked. If I recall correctly, it was focused on OUS market development. I guess I'm curious what was the focus of the diligence? And what did you find that gave you the confidence to accelerate investments here? I think some investors want to better understand and get more confidence that some of these cost-conscious markets seem right for OCS and logistics adoption.

Waleed Hassanein: Daniel, thank you for the question. I'll start, and I'll let Gerardo comment if he has anything to add. I think we learned a ton, specifically about the existence of these significant budgets for organ transplant logistics, significant budgets for increasing the utilization of donor pools, which we believe could be a first step towards expanding the overall clinical adoption in Europe. And they gave us a road map to all the tenders upcoming over the next several quarters across Europe, which is guiding us of who, where and how we can compete. Gerardo, would you like to add anything?

Gerardo Hernandez: No, nothing. You covered it.

Daniel Markowitz: Very helpful. And then just a follow-up on PAD Aviation. All the guidance metrics were kind of ex PAD, but can we get a sense for what the level of investment will look like and how that might impact the P&L, both near-term and maybe, call it, through the rest of this year and into next year?

Gerardo Hernandez: Not yet. I think, as we mentioned, we are not prepared just yet to provide any number or any metric. However, I think by Q3, we should be able to align -- internally, we should be able to provide some guidance for the remaining of the year.

Waleed Hassanein: The only thing I would add to that, Daniel, is I want to caution the audience and the listeners that PAD Aviation investment is not Summit Aviation investment. Summit Aviation, we had a huge pent-up demand in the United States. PAD is just the beginning. It's the first step towards establishing that. So we are not going to be as bullish in capital deployment until we see the demand justifies that. So it's going to be slightly different to the Summit Aviation investment. But we will provide more color and more detail in Q3.

Operator: Your next question comes from Young Li with Jefferies.

Young Li: I'll just keep it to one. Maybe just a follow-up on the prior OPO question and lines of conversation. Just kind of curious about, I guess, maybe if you can update us on the next milestones with the Modernization Act. Any changes in time lines and expectations there? As well as you talked about OPO pressures in 1Q this year. How has that dynamic evolved? How much have you seen in 2Q and expectations for second half impact?

Waleed Hassanein: Thank you for the question. Young, I really would love to address this in a direct way. There are no updates. We are waiting for CMS. CMS may delay the decision point. CMS may decide that they're not going to allow outside entities to participate. TransMedics is going to continue to grow and expand regardless of that initiative. The dynamic around the OPO, we printed Q2, everybody is looking at the OPTN data like we all do. I think we are -- I don't see that dynamic impacting the overall numbers. And as I said, I am and the team are laser-focused on our own adoption, our own expansion, our own growth.

I worry about providing commentary that is really not directly related to TransMedics that could be misperceived. That's why I'm addressing it in that fashion. At the end of the day, CMS has the ball. CMS has us on the clock. Everybody and their mothers are waiting for CMS to make a decision. Until they make a decision, we have no update, unfortunately, or no updates. So I'll leave it at that.

Operator: Your next question comes from Suraj Kalia with Oppenheimer & Company.

Suraj Kalia: Gentlemen, congrats on a nice quarter. So Waleed, a couple from my side, and I'll pose them upfront. You mentioned about the centers that you all have signed for additional service platforms and the value that TransMedics provides. Maybe if you could shed it for us what -- how do you define value in this specific context? That is question #1. And Waleed, question #2 would be the 10,000 organs by 2028, look, kidneys seems highly unlikely to contribute by that time and ENHANCE Part B -- or sorry, if ENHANCE Part A is completed, right, the DBD standard criteria label expansion will also come presumably late '27.

So help us tie the different pieces together on the 10,000 units outlook by 2028.

Waleed Hassanein: Thank you, Suraj. Let me start by addressing the second piece first. The 10,000 transplants by 2028 was established at the JPMorgan conference, I believe, in January of 2023. So we never factored CHOPS. We never factored kidney. The 10,000 transplants is on the current platform, heart, lung, liver, at the current pace, at the current, how do you call it, adoption proportion. And kidney is what gets us from 10 to 20, and that's by 2030. And 2032, that includes international numbers. So I don't want anybody to be confused that 2028 or the 10,000 transplant has any of ENHANCE Part B or CHOPS. No, this is all -- those all came after that goal was set.

So our expectation is to meet that goal with or without CHOPS, with or without ENHANCE Part B. So that's #2. #1, it's simply stated, Suraj, TransMedics has built an infrastructure that is delivering significant value across the entire transplant ecosystem. We know that transplant ecosystem is very choppy. It's very segmented and there's significant inefficiencies both from workflow, organ utilization and expense. By efficientizing that entire workflow, by providing additional technologies like our digital ecosystem, by having the command center run the entire process for the transplant program, we become a trusted partner to transplant programs. We hope that partnership translates over time to broader adoption and deeper utilization. Simply stated, that's the approach.

Operator: Your next question comes from Mike Matson with Needham.

Michael Matson: I'll just limit to one, but just on this PAD deal. So I guess I'm a little confused what you're getting with the deal. Does this company -- I assume they own some planes and then the charter business that they have, the nonmedical charter business, it sounds like that's going to continue, but I assume that will kind of wind down over time as you ramp up the OCS part of their business. Is that all fair statements?

Waleed Hassanein: Mike, thank you for the question. What we're getting with the PAD Aviation is the license to operate in Europe. This is not a small undertaking. What we expect to happen, again, similar to Summit, but will take a slightly longer pathway because of the demand is we will transition out of the charter business into 100% transplant operations or transplant missions over time as the demand ramps up. The company has a large number of pilots, a fairly sizable fleet that they operate, doesn't necessarily mean they own. And we're leveraging all of that to minimize our capital expenditures early on until the demand is there to justify us buying our own planes.

But to get access to the aviation license to operate in Europe and internationally and get access to having 40-plus pilots under our command and an efficient fleet that is available and the ability to participate in all these transplant logistics centers across Europe as the first step towards expanding our medical device adoption is critical in Europe. So that's why we -- yes, go ahead.

Michael Matson: That answers my question.

Operator: Your next question comes from David Rescott with Baird.

David Rescott: I guess I'll also limit it to one, and congrats on the results here. I appreciate the comments on this delta between the service and product revenue that you saw from a growth perspective in the quarter. But curious if you could provide any more color as to whether or not that was seen more either on the heart or liver side or DCD versus DBD? Just curious to hear why exactly or where exactly you've seen that bigger step up? And then I guess, is it fair to assume that the remainder -- for the remainder of 2026, that this higher effectively service revenue dollar per transplant should remain into the back half of the year?

Waleed Hassanein: David, I'm sorry, can you please repeat the first part of the question about DBD and DCD? I missed that. I apologize.

David Rescott: Yes. Can you hear me still?

Waleed Hassanein: Yes, I can hear you now.

David Rescott: Yes. Just curious if this higher service revenue dollar was seen more or more specifically coming from either liver or heart or DCD liver, DBD liver. Just curious if any of those specific organs were seeing a higher service utilization.

Waleed Hassanein: Yes. Thank you, David, for the question. Service is associated with OCS use and they go hand in hand. So when we have higher service dollars, it's associated with OCS use for the most part. And the delta is potentially dry runs because our team gets deployed and we charge for the service. So that could be the delta. But we see it across the board. We see it in liver. We see it in heart. We see it in lung when lung is used. Nobody can operate the OCS without service.

Gerardo Hernandez: And David, if I can add something there. We're expecting that in the second half, the gross margin of service will normalize a little bit. We will remain above historical levels, but will certainly not be comparable to the one in Q2. Service margin is closely linked to volume. So as we have more volume, we should be able to achieve those new levels of gross margin. But for instance, in Q3, when volume goes down, there is no way we can achieve those levels. I hope that answers your question.

Operator: Your next question comes from Tom Stephan with Stifel.

Thomas Stephan: I'll only get to one. But I wanted to ask about 2027 sort of in the context of Street at, I think, roughly $3 of earnings next year. Maybe, Gerardo, for you. Just curious if you can help us think about '27 OpEx or maybe '27 operating margin. This year, I think you said the midpoint of the new guide around 13%. Last year was, I think, 18% to 19%. So do we think about 2027 Op margin somewhere in between, maybe closer to either of those ends being 13% or 19%? Just any directional commentary would be helpful as we try to reset our models a bit down to the bottom line.

Maybe to ask it more bluntly, for '27 earnings, should we be above or below $2?

Gerardo Hernandez: Thank you for the question. Operating margin is a clear -- is clearly linked in the case of TransMedics to basically 3 elements. One, it's our scale, so the volume that we have. Two, it's the usual gross margin. But three, and probably more importantly, it's capturing the benefits that we have designed within OCS 3.0 and Kidney to improve our gross margin. Those 3 elements will drive a long-term operating margin that will be sustainable to the level that I have mentioned before. Right now, for 2027, it's early to say which is the right forecast.

The reason for that is because we need to see how the second half of this year evolves in terms of the different projects that we currently have to make sure that we have clarity on a reasonable 2027 view. Let me put you one example. For instance, the clinical programs, we had significant investment in 2026. But now that we have delayed -- that those programs are delayed, that investment is going to next year. We need to see how the rest of the programs evolve, as I said, to have better -- clearer visibility, and then we will be able to provide a better view.

So with that, I don't want to go into more details, but certainly, in Q4, we will have a better view and provide guidance on 2027.

Operator: This concludes the question-and-answer session. I'll turn the call to Waleed, for closing remarks.

Waleed Hassanein: Thank you, operator. Thank you all very much for taking the time to be in this call and looking forward to our next call. Thank you. Have a great evening.

Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.