Kestra (KMTS) Q1 2027 Earnings Call Transcript

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DATE

Monday, Sept. 14, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Vice President of Investor Relations - Neil Bhalodkar
• President and Chief Executive Officer - Brian Webster
• Chief Financial Officer - Vaseem Mahboob

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TAKEAWAYS

• Revenue -- $31.0 million, representing 60% year-over-year growth driven by wearable cardioverter defibrillator market expansion, competitive share gains, and a higher mix of in-network patients.
• Gross Margin -- 56.5%, increasing more than 10 percentage points year over year due to volume leverage, cost improvement projects, and higher revenue per patient fitting.
• Fiscal Year 2027 Revenue Guidance -- $141 million, updated from a prior target of $137 million, representing projected growth of 48% compared to fiscal year 2026.
• GAAP Operating Expenses -- $55.2 million, compared to $37.7 million last year, reflecting commercial expansion and accelerated investment in research and development.
• Adjusted Operating Expenses -- $44.2 million, excluding $1.4 million in nonrecurring items and $9.5 million in stock-based compensation.
• GAAP Net Loss -- $44.1 million, compared to $25.8 million in the prior year period.
• Adjusted EBITDA Loss -- $24.0 million, compared to a loss of $19.4 million last year, as the company invested in commercial strategies and R&D.
• Total Liquidity -- $320 million, including $244.7 million in cash, cash equivalents, and investments plus $75 million in unused committed credit.
• Operating Cash Flow -- $32.3 million used in operations during the first quarter, reflecting company-wide bonus payouts and the timing of supplier payments.
• Market Growth -- 14%, representing the dollar-basis expansion of the wearable cardioverter defibrillator market during the 12 months ended July 2026.
• In-network Mix -- 80%, increasing from 70% at the time of the company's initial public offering 18 months ago, which improves revenue cycle management efficiency.
• U.S. Market Share -- 15%, estimated for the domestic market in the most recent quarter.
• VA Network Coverage -- 9 million members, representing the population reached through the federal supply schedule for the U.S. Department of Veterans Affairs.
• Fiscal Year 2027 Operating Expense Guidance -- $220 million, intended to drive increasing operating leverage as revenue grows at a projected 48%.
• Research and Development Expenses -- $6.8 million, increasing 70% year over year to accelerate late-stage R&D programs.
• Capital Expenditures -- $8.3 million, primarily consisting of purchases of property and equipment.
• Short-term Investments -- $130.4 million, as reported on the consolidated balance sheet as of July 31, 2026.
• Long-term Debt -- $72.5 million, net of discounts, following the announcement of a new $200 million term loan facility in July 2026.
• Accounts Receivable -- $15.4 million, net of uncollectible accounts, as of July 31, 2026.
• Non-ischemic Patient Population -- 60%, representing the proportion of typical wearable cardioverter defibrillator patients who may benefit from expanded payer coverage.

SUMMARY

Kestra Medical Technologies, Ltd. (NASDAQ:KMTS) reported 60% revenue growth for the first quarter of fiscal 2027 and increased its full-year revenue outlook to $141 million. Management reported that gross margin expanded for the 11th consecutive quarter, reaching 56.5% due to volume leverage and improved unit economics. The company stated that a significant national payer expanded coverage to non-ischemic patients, potentially impacting a segment that represents over 60% of the target population. Management also confirmed a revised long-term gross margin target in the mid-70% range, up from the previously communicated 70%.

• The company is implementing an AI roadmap focused on patient support, revenue access, and commercial productivity to manage increasing transaction volumes. President and Chief Executive Officer Brian Webster stated, "The objective here is straightforward increased rep productivity as measured by patient fittings per rep without requiring a proportional increase in headcount."
• Management is utilizing a territory management strategy that involves splitting high-volume areas to increase prescriber penetration. Webster noted, "We are finding that when we split a territory and add a clinical account specialist, more feet on the ground closer to the customer compounds growth."
• The company increased research and development spending to finalize a late-stage project expected to introduce new clinical capabilities. Webster reported, "Our team is completing an exciting late-stage R&D project intended to further extend our clinical advantage with the performance of the ASSURE system."
• A major national payer recently updated its policy to cover non-ischemic patients, a move management views as a signal of clinical evidence impacting payer behavior. Webster stated, "This is significant since over 60% of the typical WCD populations are non-ischemic."
• Management reported that the wearable cardioverter defibrillator market is significantly underpenetrated, noting that 6 out of 7 indicated patients did not receive protection in 2025.
• The company expects its cash burn to decline sequentially throughout fiscal 2027 as it achieves greater operating leverage.

INDUSTRY GLOSSARY

• ASSURE WCD: A wearable cardioverter defibrillator designed to protect patients at risk of sudden cardiac arrest.
• CRS: The Cardiac Recovery System platform, which integrates hardware, digital health capabilities, and patient support services.
• GDMT: Guideline-Directed Medical Therapy, the recommended treatment protocol for patients with heart failure or arrhythmias.
• Ischemic: Heart conditions related to restricted blood flow, often caused by coronary artery disease or past heart attacks.
• Non-ischemic: Cardiovascular conditions not caused by coronary artery disease, such as certain types of cardiomyopathy.
• RCM: Revenue Cycle Management, the financial process used by healthcare providers to track patient care episodes from registration to final payment.
• SCA: Sudden Cardiac Arrest, a condition where the heart suddenly and unexpectedly stops beating.
• WCD: Wearable Cardioverter Defibrillator, a device worn by patients that monitors heart rhythms and delivers a treatment shock if life-threatening arrhythmias are detected.

Full Conference Call Transcript

Operator: Good afternoon, and welcome to Kestra Medical Technologies First Quarter Fiscal 2027 Earnings Conference Call. This conference call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to Neil Bhalodkar, Vice President of Investor Relations for introductory comments.

Neil Bhalodkar: Thank you, [ Latif. ] Good afternoon. Thank you for joining Kestra's First Quarter Fiscal 2027 Earnings Call. With me today are Brian Webster, President and Chief Executive Officer; and Vaseem Mahboob, Chief Financial Officer. This call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. These statements are based on Kestra's current expectations, forecasts and assumptions, which are subject to inherent uncertainties, risks and assumptions that are difficult to predict. Actual outcomes and results could differ materially from any results, performance or achievements expressed or implied by the forward-looking statements due to various factors.

Please review Kestra's most recent filings with the SEC, particularly the risk factors described in our Form 10-K for additional information. Any forward-looking statements provided during this call, including projections of future performance, are based on management's expectations as of today. Kestra undertakes no obligation to update these statements, except as required by applicable law. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Please refer to our earnings release for a reconciliation of these measures to their most directly comparable GAAP financial measures.

With that, I will turn the call over to Brian.

Brian Webster: Thanks, Neil. Good afternoon, and thank you for joining us on today's conference call. We're excited to discuss the strong financial performance we had in the first quarter and the continued progress we are making on our key operational objectives. I'd like to begin though with a reminder of the purpose behind our work that is providing innovative, intuitive medical technologies that protect and support at-risk patients. That mission guides both the technology we create and the experience we deliver, helping patients remain engaged, connected and protected throughout their care. One patient's experience this quarter demonstrates how those forms of protection work together.

The patient was prescribed the ASSURE WCD for protection during the high-risk period between removal of his implanted defibrillator and scheduled lead extraction. Shortly after fitting, the ASSURE system recorded more than 120 diverted therapies in 1 night, prompting immediate outreach from our heart alert services team. The team learned the patient was driving alone through rural Utah with his 2 dogs. He initially resisted seeking care. Heart alert services remained in close contact until he agreed to go to the nearest emergency department. The team sent his clinical reports they had to the support team at the emergency department. Upon arrival, clinicians determined he needed to be airlifted to a Las Vegas hospital for specialized electrophysiology care.

After 8 days in the hospital, he underwent a successful lead extraction and received a replacement device. This case demonstrates the differentiated value of our integrated care model. ASSURE provided continuous protection and clinical insight, while heart alert services turn that insight into action, moving a patient from unseen risk to urgent specialized care, in this case, across state lines. This is the cardiac recovery system platform in action, therapeutic protection, clinical insight and responsive support working together when it matters most. I would now like to turn to our recent financial performance. In the first quarter, we continued to reach more patients at risk of dangerous cardiac arrhythmias while delivering another quarter of strong financial performance.

Revenue advanced sequentially off a strong fourth quarter and grew 60% year-over-year to $31 million. Gross margin of 56.5% increased over 10 points year-over-year and 175 basis points sequentially. This was the 11th quarter in a row of sequential gross margin expansion, demonstrating the attractive unit economics and volume leverage of our business model. Based on the progress to date, we are increasingly confident that Kestra can achieve mid-70s gross margin percentage in the next few years. This represents a meaningful increase from our previously communicated target of 70%. Importantly, though, Kestra is not simply a gross margin story. With strong revenue growth and gross margin expansion, we are enhancing the operating leverage in our business.

This leverage supports investments we are making in key growth drivers that we believe will yield significant earnings power and long-term value for Kestra and its stakeholders in the years ahead. We have been deliberately building towards this point. For example, we have invested in building the foundational technology stack needed to scale the business, including cloud platforms, enterprise data capabilities, workflow automation and system integration layers. Those investments are now enabling the next phase of value creation through AI and automation. Our AI road map is highly disciplined and firmly grounded in measurable business outcomes. Every initiative is linked to a specific operating KPI and evaluated based on its ability to improve growth, efficiency or enhance scalability.

We are initially prioritizing 3 areas where we believe AI and automation can create significant value. First, patient support and adherence where AI-powered patient support agents and automated outreach can help maintain patient engagement and aware compliance while increasing the productivity of the Kestra team supporting a rapidly growing patient base. Second, revenue access and collections. We're automating intake, prior authorization and reimbursement workflows can improve our fittings to claim conversion and collections while materially reducing administrative effort. And third, commercial demand acceleration, where AI assists our sales representatives with call preparation, follow-up, account prioritization and clinical documentation. The objective here is straightforward increased rep productivity as measured by patient fittings per rep without requiring a proportional increase in headcount.

Together, these initiatives demonstrate the leverage in the technology foundation we have built and how AI and automation can improve key operating metrics while bending the operating expense curve as transaction volumes continue to grow. Turning to our commercial organization. Our territory managers are continuing to win share in competitive accounts while simultaneously expanding the WCD market as prescribers increasingly recognize the benefits of protecting more patients than they have historically. Our newest reps are ramping faster than prior cohorts, while our legacy reps continue to generate strong growth and same-store sales. In some of our largest markets, we have been deliberate and strategic about splitting high-volume platinum territories to go deeper and reach more prescribers in existing accounts.

We are finding that when we split a territory and add a clinical account specialist, more feet on the ground closer to the customer compounds growth. It's how we ultimately turn a foothold into a fully penetrated account and put both territories on a path to becoming high-volume platinum territories. This is a powerful model for growth and operating leverage. Higher territory manager productivity is a meaningful driver of operating leverage and also positions us to more effectively capitalize on the significant growth opportunity ahead of us, given how underpenetrated the WCD category remains. As we have previously noted, despite the overwhelming evidence that an external fibrillation shock is effective at terminating dangered cardiac rhythms, WCD therapy remains underutilized.

In 2025, 6 out of 7 patients that were indicated for a WCD were not protected by one. This statistic speaks to the enormous potential in front of us. The innovation and clinical evidence we have brought to the category is beginning to change this. Based on our financials and those of the incumbent, the WCD market grew approximately 14% on a dollar basis in the 12 months ended July of 2026. We believe we are still in the early innings of market expansion, and we see this category growing into a multibillion-dollar market in the years ahead. Turning to market access. We continue to bring more payers in network while also making progress on improving our RCM capabilities.

At the time of our IPO 18 months ago, approximately 70% of our biddings were for patients with in-network benefits. This figure is now in the low 80s, and we expect this to increment higher in our FY '27 as we sign new contracts in target markets. Higher in-network mix meaningfully increases our team's efficiency and positively impacts all RCM metrics, including revenue per patient. About 6 months ago, we announced that Kestra had been added to the federal supply schedule for the U.S. Department of Veterans Affairs. As a reminder, the VA is the largest integrated health care network in the U.S. and covers 9 million members, nearly 50% of whom are over the age of 65.

Over the last 6 months, we have seen a steady increase in volumes at the VA and still have a significant multiyear opportunity to grow our share within these facilities. It is important to note that there are over 3,000 payers in the U.S. So there is still a long tail of regional and local payers we are working to bring under contract. Of note, this month, a significant national payer has expanded their coverage to non-ischemic patients undergoing guidelines-directed medical therapy. This is the first time this large payer has covered both the ischemic and non-ischemic patients. This is significant since over 60% of the typical WCD populations are non-ischemic.

We believe this is a strong signal that the recent clinical evidence is having an impact on payer policies for WCDs. Innovation also continues to be a central area of focus and investment for Kestra. We are progressing as planned with our Biobeat Technologies partnership to integrate noninvasive blood pressure monitoring into the ASSURE platform. In addition, our team is completing an exciting late-stage R&D project intended to further extend our clinical advantage with the performance of the ASSURE system and also bring new first-in-category capabilities to the market. We expect to discuss this further in the next quarter.

Over time, we believe innovation will help us accelerate market growth and win additional market share by further differentiating our product from the incumbent. And more importantly, by providing additional clinical value and diagnostic insights to physicians, we believe it will result in them prescribing WCDs to more of their patients that heretofore have gone unprotected. In conclusion, the fundamentals of Kestra's story have never been stronger. Our product differentiation is clear and compelling. The WCD market is expanding rapidly with tremendous room for further penetration. Kestra continues to deliver top-tier MedTech revenue growth. Gross margin has expanded consistently and meaningful opportunity remains.

We have a strong balance sheet and our execution continues to be crisp and the foundation we have built positions Kestra for strong and durable growth for years to come. I'd like to thank our incredible team in the field and also here at the home office in Kirkland for their passion and commitment to the Kestra mission. I will now turn it over to Vaseem, who will discuss first quarter financial results in more detail and provide our updated fiscal year 2027 revenue guidance. Vaseem?

Vaseem Mahboob: Thank you, Brian, and good afternoon, everyone. We had a strong financial performance across the board in the first quarter. Total revenue was $31 million, an increase of 60% compared to the prior year period. Revenue growth was driven by continued WCD market expansion, competitive share gains, a higher mix of in-network patients and ongoing improvements in our revenue cycle management capabilities. We continue to see improvements in all 3 key drivers of our revenue model, our prescription bill rate, our bill rate and our collections performance. As we continue to bring more payers in network, we expect to see benefits in revenue growth, gross margin and our profitability profile.

As Brian noted in his prepared remarks, we are investing in rev cycle AI tools and other automation projects that we believe will drive significant operating leverage as we scale the business. Turning to gross margin. Our gross margin increased to 56.5% in the first quarter versus 45.7% in the prior year period. This continued expansion in our gross margin was driven by attractive unit economics inherent in Kestra's business model, an increase in revenue per fit from more in-network patients and a decline in cost per fit driven by volume leverage and execution of cost improvement projects.

In the quarters ahead, we expect to see steady and consistent increases in our gross margin as our rental model benefits from higher fittings. We are confident in our ability to achieve a mid-70% margin in the next few years, which is higher than our prior outlook of 70% gross margins. GAAP operating expenses were $55.2 million in the first quarter compared to $37.7 million in the prior year period. Included in GAAP operating expense are $1.4 million of nonrecurring items related to a Biobeat milestone payment and onetime professional fees related to a key R&D project that Brian noted, we will be discussing in detail in the next quarter.

Excluding nonrecurring costs and stock-based compensation, operating expenses were $44.2 million in the first quarter compared to $30.3 million in the prior year period. The increase was primarily attributable to growth in expenses related to the company's commercial expansion and accelerated investment in our late-stage R&D programs. GAAP net loss was $44.1 million in the first quarter compared to a GAAP net loss of $25.8 million in the prior year period. Adjusted EBITDA loss was $24 million in the first quarter compared to an adjusted EBITDA loss of $19.4 million in the prior year period. Our cash used from operating activities in the first quarter was $32.3 million.

As expected, our Q1 cash burn was higher on a sequential basis, driven by payout of our company-wide bonus and timing of payments to suppliers. We expect to burn -- we expect our burn to decline sequentially throughout fiscal year 2027 as it did in fiscal year 2026. In July, we announced a new $200 million term loan facility. This non-dilutive financing was a great outcome from Kestra. It fortifies our balance sheet, reduces our cost of capital and provides a significant financial flexibility to invest in our commercial strategies and expand our fleet to drive durable best-in-class growth for years to come. Cash, cash equivalents and investments totaled $245 million as of July 31.

Including unused committed availability under our term loan agreement, Kestra has a liquidity of approximately $320 million. In summary, we continue to deliver top-tier MedTech revenue growth while significantly expanding our gross margins and fortifying our balance sheet. Our investments in the field team, RCM capabilities and R&D initiatives position Kestra to capitalize on the large and growing WCD market opportunity and drive durable revenue growth for years to come. And while we are continuing to invest in our growth strategy in fiscal year 2027, you will see Kestra drive increasing levels of operating leverage each year going forward. For these reasons, we have high visibility and confidence in our path to profitability over the next few years.

I will now provide updated fiscal year 2027 revenue guidance. We expect revenue of $141 million, representing growth of 48% compared to fiscal year 2026. This compares to prior fiscal year 2027 revenue guidance of $137 million. We expect fittings growth to be driven by deeper penetration within existing accounts and the activation of new accounts as we invest in the regional coverage. We expect growth in revenue per fit to be driven by a higher mix of in-network patients and continued investments in our rev cycle management capabilities. With that, operator, we have concluded our prepared remarks and are ready to proceed to the Q&A portion of the call. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Larry Biegelsen of Wells Fargo.

Larry Biegelsen: Congrats on the nice start to the year here. Brian or Vaseem, I wanted to ask about the guidance and the cadence. So you beat by about $2 million, raised by about $4 million. So my question is what gave you the confidence to raise by more than the beat this quarter? And how should we think about the cadence for the rest of the year? I think you said on the last call, you expect an acceleration in the second half due to some of the reps you hired last year. And I have one follow-up.

Vaseem Mahboob: Larry, thanks for the question. Our fiscal year 2027 guidance of $141 million implies a 48% growth, which is among the highest in small-cap medtech. Our revenue growth has historically been driven by prescription volume growth, in-network mix and RCM improvements and the growth of our field team. These KPIs are all tracking in the right direction and give us a lot of confidence in increasing our guidance to 48% growth in fiscal year 2027. Higher prescriptions will be driven by winning new accounts, going deeper in existing accounts and market expansion. We expect revenue per fit to benefit from higher in-network mix as we continue to make progress on payer coverage.

And as we said last year, same time, we do expect those reps to ramp up here in the second half of the year. So we expect the second half to be faster than the first half.

Larry Biegelsen: That's helpful. And just for my follow-up, Brian, on the pipeline, I guess, update on Biobeat and then any milestones. I guess I've got to try to ask about this new pipeline product. Just any color on kind of where you're focused? Is it the patient experience, the algorithm, new features? And how far away from market is this? Anything you could share?

Brian Webster: Yes. I appreciate the question. We will -- we do expect to be able to talk about it in more depth over the next quarter. We're not quite ready to do that yet. But I will say that what we expect to do with the new technology is leverage the platform that we've developed and extend that platform, get additional capability, as I mentioned in my comments, a capability that doesn't exist in WCD today. And so we're excited about that. That's part of why we're investing into that and excited to discuss that with you all over the next few months.

Operator: Our next question comes from the line of Matthew O'Brien of Piper Sandler.

Matthew O'Brien: Would love to talk about that gross margin update, the mid-70s. I guess the theme, what is it that you're seeing or that you are expecting now that gives you the confidence to raise it? I mean something maybe around 400 to 500 basis points from what we were expecting before. And is the time frame the same versus the 70% you expected to get to? Or is it just a little further out? And then I have a follow-up.

Vaseem Mahboob: Yes. So just on gross margins, Matt, thanks for the question. We have now expanded gross margins 11 quarters in a row with margin increasing over 10 points year-over-year in this quarter. We continue to benefit from higher revenue per fit based on improvements on our in-network mix and also all of the CIP programs are delivering results. As we have said previously, we should see steady and consistent sequential increases in gross margin going forward. We have good line of sight to achieving gross margins of the mid-70% that we talked about over the next few years, driven by the attractive unit economics in the business model that we have talked about in the past.

But this is up from our prior view of 70% and the confidence really comes from 3 things. One, is the reduction in cost per fit driven by the progress of the programs, the volume-based reductions that we're seeing from our suppliers. Improvements in revenue per fit, mostly driven by this in-network mix continue to move higher. And we feel really confident that the unit economics plus the volume growth that we expect over the years will help us get to that mid-70% gross margin.

Matthew O'Brien: Okay. Appreciate that. And then I guess a follow-up on Larry's question on the guide. If I look at the cadence here, expecting more in the back half of the year in terms of the acceleration would lead you to some pretty big numbers in Q3 and Q4, especially Q4 sequentially versus what you've done -- what you did in fiscal '26. So what are you seeing from a rep productivity perspective, splitting these territories and seeing improved productivity from those regions, et cetera, that gives you the confidence that you're going to be able to get to these levels throughout the course of the year?

Brian Webster: Yes. Thanks, Matt. Just -- first of all, I appreciate you pointing out that's a big quarter that last one of the year. we agree. But I think what we're seeing -- we gave a couple of hints in the prepared commentary. What we're seeing is we're having success as we split some of the larger territories, and we doubled down into those territories. So we're seeing the rep productivity opportunity be significant as we further penetrate some of these accounts.

And then the natural leverage that we will get from the cohort of reps that we hired late in FY '26 and here in the early stages of FY '27, we'll start to see productivity in the back half of the year. So it's a combination of those things that really gives us the confidence, plus a lot of the benefit we will see from some of our ongoing marketing programs that support the commercial team, and we expect the combination of all those things to lead to that kind of growth.

Operator: Our next question comes from the line of Michael Polark of Wolfe Research.

Michael Polark: I know the disclosure is changing, but I'm going to take a crack at it anyways. In the quarter, you beat the Street by 7% on revenue. I'm wondering if you'd help us frame the portion of that beat from volume versus the portion of that beat from revenue per fit relative to what you think the consensus model was. I'm just working to keep the model build as high quality as it can be as we enter this new era.

Vaseem Mahboob: Yes. So great question. We're obviously not commenting on the different elements of our previously communicated conversion rate, Mike. But we can tell you that we saw continued improvement in all of the KPIs that drive the revenue model, which is the fill rate, the bill rate and obviously, the in-period collections. So we feel really good about where we are. And as we have said, the best way to kind of think about the growth relative to prescription is to look at the historicals. And in the past, the prescription performance has lagged the revenue number by a couple of points. And that relationship will hold for this year as it has in the past.

And we feel very confident about looking at the data that way. So -- and we'll be providing you those details at the end of the year as we have promised. So overall, like I said, the KPIs are tracking all in the right direction, and we really feel great about the rest of the year as we head into the second quarter.

Michael Polark: Helpful, Vaseem. For the follow-up, Brian, I'm curious for more color on one of your mentions. So you mentioned a large commercial payer is now covering the non-ischemic population, and that's the first time that's happened. Clinical evidence cited is the reason I think we can understand that. My question is how many commercial payers don't cover the non-ischemic population? Is this the last mover? Or is this a first mover or one in the middle? I'd be curious where we are in that side.

Brian Webster: Yes, that's a good question, Mike. Among the large payers, I would say this was the outlier. Most of the large payers already covered that patient population. This one had been one that had sort of held out on that for a long time and just recently came back with a new coverage decision. So there are other regional and smaller payers that have took similar positions to that large payer. And so we're optimistic that we'll also see some movement with some of them. But it's a good signal.

It's a good indicator that some of the evidence around the actual risk for some of these patients is starting to make a difference as we've been able to communicate it better. And I think that you're seeing that in the 14% market growth, and you're seeing that in payer coverage decisions like this.

Operator: Our next question comes from the line of Marie Thibault of BTIG.

Marie Thibault: I wanted to sort of understand a little bit more about the accelerated investment that you've called out in some of these key R&D programs. Should we expect R&D spend to be a little bit higher than we've previously been thinking about for the rest of the year? How would you have us think about the cadence of some of those investments? And then as part of that, you mentioned with the AI efforts, you're going to hopefully curb the operating expense costs over time. Wondering if you have a time line on those impacts. I know it's probably fairly early, but any details on the time lines around that?

Brian Webster: Yes. Thanks, Marie. This is Brian. I'll take the R&D question and then Vaseem, you can grab the AI question. So on the R&D question, we do believe that those expenses were onetime in nature, we believe that the R&D expense line will go back down. In my experience, when you have a multiyear R&D program that is coming close to the end of its schedule and you have an opportunity to apply financial resources to accelerate and protect that schedule. And that's a bet I will make every day of the week, and that's what we did. And we feel good about that investment. We think that's going to net the results that we are looking for.

But we do see that the R&D line when it comes to the spend will come back down in the forward quarters.

Vaseem Mahboob: I think, Marie, just to kind of add to that Brian's overall commentary on kind of OpEx, we did see the OpEx came in slightly higher at $55 million than our previously communicated number and that was really driven by the Biobeat milestone payments. But I think more importantly, you'll see our overall R&D spend was up about 70%, which is significantly higher than what it has been historically. And that's really to kind of ramp up or almost finalize the investment in the R&D program. So and that's why we're ready to kind of talk about the details here in the next 90 days.

We expect the GAAP OpEx for the year to be at $220 million in 2027, which reflects continued investment on the commercial side. And then I think to Brian's point, the R&D spend returning back to historical levels, which is somewhere in the 5% to 7% range in the second half of the year. But that $220 million would still mean an OpEx growth of 20% in fiscal year '27 versus the guidance of 48%. So we will continue to drive significant operating leverage on OpEx overall.

But I think the -- a lot of that operating leverage in outer years, not this year is predicated on some of these AI programs, but we are making investments this year that will help us bend the cost curve for revenue cycle management and improving rep productivity and things like that, that Brian talked about in the prepared remarks.

Marie Thibault: All right. That's very helpful. And then my follow-up, just curiosity really. I recall last quarter, you flagged that a meaningful portion of your prescription volumes have not yet converted to revenue and would show up in this fiscal quarter. Are you able to quantify at all how many millions came in as a result of the strong volume last quarter?

Vaseem Mahboob: We haven't -- historically, we are not providing that detail, like I said, to Mike's question. I think historically, the relationship between the revenue growth and prescription has been that prescriptions has lagged by a couple of points, and I think that will continue for this year.

Operator: Our next question comes from the line of Rick Wise of Stifel.

Frederick Wise: Maybe, Vaseem, you could help us think through thoughtfully the quarterly cadence as we proceed through the year. You've been very clear about the second half being higher, larger, bigger than the first half. But that was the pattern last year as well, of course. But last year as well, the dollars each quarter had a nice step-up walking through to make that stronger half as well.

Back to Marie's excellent question, was there anything unusually strong or onetime in nature in the first quarter that might make us think anything other than we'll see whatever it is, a solid $1 million or $2 million sequential step-up quarterly into the second quarter and then sort of more of the same as you get into the second half and that, as you note, the rep productivity accelerates, et cetera.

Vaseem Mahboob: So yes, so again, great question, great try. I think I'm going to say it one more time, slightly differently. I think if you think about last year, this is Q1, we were just coming off of the IPO. And if you remember, at that time, we had just started to ramp up the hiring of the sales team, and that was the contract last year, which was that we know there's a ramp. We know what that ramp looks like. And as we have said in the past and we'll say it today, our rep productivity continues to ramp to that model that we have discussed with you guys in the past.

So yes, the 60% revenue growth in Q1 is a favorable comp off of that 19 and change number from Q1 last year. But then at the same time, when you look at the guidance that we are providing here for the remainder of the year, the first half versus the second half is consistent with last year. So there's no difference. And that's also predicated again this year based on the significant hiring that we did in the last 6 months, and those reps ramp up in both points of the board. So there's nothing different this year than last year.

Frederick Wise: Okay. As you can tell, we're all obsessed. Just as a follow-up question, I wanted to -- I'm not quite sure how to ask that question, but I wanted to follow up, Brian, and your extended commentary and not the same as every quarter commentary on AI and automation initiatives, bending, I think you said the operating margin growth curve. It was -- you broke up a little bit. I couldn't quite get your exact language. But -- given that focus and your intensity about this and all the points you made, the different points, when does this -- is there 1 or 2 of these in particular that are going to be meaningful?

And when do we see the impact? Is it -- is this happening right now? Are we going to see it more in fiscal '28? Just help us better understand the implications of all this work you're doing.

Brian Webster: Yes. Thank you, Rick. I appreciate that question. I would say a couple of things. First of all, when we look at the cost per dollar of revenue that comes from the volume-based G&A functions, that's where we see that curve starting to occur on the expense side. We've started to see that gradually here in FY '27. We expect that to accelerate in FY '28 and '29 as we implement more of the technologies. We think there's a really nice opportunity in this business, when you've got this many transactions and this volume impact additional market share, then if you don't implement the automation, then you are committing yourself to human volume-based G&A investment.

And so what we're trying to do is get ahead of that with the investments in the technology stack that I talked about and the AI and automation. And we're starting to see a little bit of that benefit now, and we'll see that curve accelerate as we move into next year and the year beyond.

Operator: Our next question comes from the line of Travis Steed of BofA.

Stephanie Piazzola: This is Stephanie Elghazi on for Travis. Congrats on a good quarter. With the guide update, I was curious if there's any updates to how you're thinking about market expansion and market share. You noted market growth of around 14% this past quarter. Any expectations for where that can go this year? And then on market share, you had expected incremental share gains this year versus the 4 points you gained last year. So any updates in terms of market share as well?

Brian Webster: Yes. Thanks for the question, Stephanie. I think in terms of market growth, the market is definitely accelerating. We've seen that market growth has essentially doubled since the IPO. And so we don't have any reason to believe that it's going to decelerate at this point, especially when we see that our competitor is spending a significant amount of energy on pushing the market growth in the category. So -- and obviously, we are doing that as well. So we expect that to continue to grow. How fast that grows or not is difficult to call at this point. We think in this most recent quarter, we're somewhere around 15% market share in the U.S. market.

And certainly, when we're growing at 60% and our competitors is growing at a fraction of that, then that means that we're going to continue to capture share. And I think we -- in our long-range planning, we have fairly modest assumptions around market share and where that goes, and we're ahead of schedule when it comes to that, we expect to continue to see really nice gains as we field a larger team, and we feel some of this additional capability and innovation that we talked about.

Stephanie Piazzola: That's helpful. And then you talked about new reps ramping faster than prior cohorts. Just curious what you're seeing now versus before? And is there a way to frame how much revenue growth is driven by account expansion versus deeper penetration into existing accounts?

Brian Webster: Well, the new cohorts ramping more rapidly, I think, has to do with some of the investments we've made in our -- both our recruiting capabilities and our training capabilities. We really made a big investment in how rigorous our training is for our new territory managers as they come into the company, and we're seeing the benefits of that. I think we've got a mix between going deeper in some of the accounts and splitting some of the territories, as I mentioned, but we're also expanding into new territories where we haven't had a presence at all. And some of the exciting growth that we're seeing is definitely coming from those expansion territories. So it will be a mix.

I don't know the exact ratio right now, but I think we'll continue to see a mix between going deeper in certain territories versus expanding into brand-new territories.

Operator: Our next question comes from the line of Robbie Marcus of JPMorgan.

Unknown Analyst: This is [ Alan ] on for Robbie. Just one quick one. You previously talked to gross margin expansion of around 700 basis points. It sounds very bullish on gross margin progression and outperform expectations so far in the first quarter. So just curious if you have an update on that similar to how you updated operating expense expectations.

Vaseem Mahboob: Yes. So yes, we did comment on the 70% now kind of heading north to kind of the mid-70s. We do expect that based on the current gross margin guidance, that 700-point expansion for next year, I think, is pretty solid. But as you think about the gross margin number for fiscal year 2029, we expect to -- for the year to deliver 70% gross margin. And that would basically give you a pretty clear line of sight that the second half of that year is going to be gross margin that's going to be north of 70%. So again, we are not talking about mid-70s in 5 years. We're talking about mid-70s in the next 2 to 3 years.

So -- and we're very optimistic and have a lot of confidence in our ability to get there.

Operator: [Operator Instructions] Our next question comes from the line of Suraj Kalia of Oppenheimer & Company.

Suraj Kalia: Congrats on a nice quarter. Gentlemen, 2 questions, one for Brian and one for Vaseem. Vaseem, 14% nominal growth. Can you characterize it by unit growth and where you stood in terms of share? And Brian, my second question, I'll ask that upfront. One of your comments caught my attention about AI, and I'm just paraphrasing here, your endeavor for AI to help improve fittings per rep. I guess I'm curious what kind of a data you're going to have your AI models to improve this metric because it could have pretty interesting implications for improving on patient acquisition costs over time.

Vaseem Mahboob: Yes. So let me take the volume piece first. So as I said in my previous commentary to the questions, since we are not commenting on prescriptions and fittings, and we committed to providing that on an annual basis, I'll just kind of close and provide more clarity. We do -- the conversion rate, as we used to talk about was up and all of the elements that drive that conversion rate were all trading better than expected. So the 60% growth that we delivered this quarter and was a direct consequence of that.

And again, as we've said, when we give you that annual number at the end of this year on prescriptions and fittings like we did last year, you will see that the relationship between revenue and the prescriptions will hold at prescriptions being a couple of points lower than the top line. And that's predicated on us continuing to make improvements in our revenue cycle management capabilities and the ability to fit those patients and convert those prescriptions and revenue.

Brian Webster: Yes. Thanks, Suraj. On the revenue fittings per sales rep, that's really a measure of sales rep productivity. So it's really about using some of those AI tools to free up time to make the rep -- give them more data to be able to decide how they spend their day, where they spend their day, where the insights are that allow them to better manage their territories. And ultimately, as we make them more efficient, then that means they can spend more time penetrating the accounts that they get into, and that then leads to the higher fittings per sales rep. And yes, you're spot on when you say that, that's a pretty meaningful metric.

I think it's very clear to us that when we think about the path to profitability, that path to profitability, that road runs right through rep productivity. And that's why we're investing in some of those tools, why we're investing in all the training capability and recruiting capability and all those things with regards to our commercial team. So I appreciate that question.

Operator: I would now like to turn the conference back to Brian Webster for closing remarks. Sir?

Brian Webster: Thank you, and thank you all for your great questions and for attending the call. We're obviously excited by the start to the year. We're certainly bullish on our story. And when it comes down to it, when you have a product that is clearly superior, you have a category where there is an unmet need of a significant number of patients. You have the ability to expand your commercial team to cover the market. You have clinical evidence that is compelling and you add into those new innovation, that all leads to market growth and it leads to rapid share capture. And that's what we're seeing and we expect to continue to see.

We're very proud of the execution that the team has had over the prior quarters, including this Q1 that we're reporting on now. And we're just getting the year started. It's a new year. It's a new business plan. We have new priorities this year. And as we fold those in, and we're excited about executing against the plan for FY '27. So thank you very much, and we'll look forward to updating you again in a few months.

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

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