What's with Transmedics (TMDX)

@Fool4ZTribe right. They are sounding confident, but it’s a little concerning that they seem to be saying that currently they are somewhat at the mercy of overall transplant volumes to drive growth, versus steady market share gains. Their guide is for a bounce back to Q2 volumes and will translate to 42% YoY growth in Q4 which would be a massive decline for them.

They’ve mentioned a few catalysts in 2025 and seem confident they can basically triple their volume over the next few years, but after 6 straight quarters of sequential double-digit revenue gains, it seems that they are a bit “stuck” until the next catalyst. I’m unclear when that will be in 2025. The 2025 guide will be interesting, not sure if I want to roll the dice on it at this point.

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@prust04 Agree. I thought his analysis of NRP costs was particulary interesting - basically that NRP presented huge expenses and other issues that made it uncompetitive with OCS.

Also the fact that they own 18 craft, but effectively 10 were in service for the month. That seems like a low %. They haven’t mastered the plane mangement operation - but can/will they? I think that’s do-able.
Vince

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I thought owning your own fleet would obviate this kind of logistics problem. Very disappointed. I still believe in the future, but this shakes my confidence in management (and my own investing acumen).

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I must say, I did not see that coming. Saul’s instincts in his posts in this thread were pretty impressive in hindsight. I have slacked off a lot in following all the details about this company, but there were some clues leading up to this.

I have not sold any shares, and I don’t plan to - but my position is much smaller than it used to be. I do not expect they will ever return to 100% growth, but I think it is a good long term company and that is the way I’m treating it.

I expect short term weakness. This late in the year, with this big of a drop, this will become a tax loss harvesting target for many people IMO.

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TMDX misses the revenue estimate by ~5%, which deserves a haircut, but 25% seems too much. A 10% range feels more appropriate. I added aggressively after hours in the mid to low 90s. At these prices, the forward EV/EBITDA multiple is approximately 23 EV/EBITDA, and they are expected to grow EBITDA by approximately 40%. It’s rare to find the forward EV/EBITDA multiple at roughly 1/2 of the expected EBITDA growth rate.

Also, on the Q2 earnings call TMDX management implied that Q3 would be weak because of seasonlity and maintenance. Seasonality because not as many transplants get schedued in the summer months and planned plane maintenance so 25% seems like an over reaction.

TMDX continues to have great fundamentals and now the valuation is an unbelievable opportunity IMO.

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What can I say? I didn’t “know” what was happening, but someone (friends of the pilots? cousins of people working for the company? etc, etc) were seeing the slowdown in growth, and I’m happy that I exited at $143 to $130. I pointed out that it was a company with a limited TAM, and growing over 100% yoy to fill out that TAM because it had a better solution, but when it reached the end of the TAM the growth rate would fall very rapidly. The price fall of the stock when everything else I had was rising was making me very uncomfortable. As I pointed out in the Knowledgebase, sometimes selling is the most important thing you can do. (It would be good to reread that section).

I still could be completely wrong but now I doubt it. Possibly partly wrong, but I’ve moved on.

Saul

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Revenue DECLINED sequentially !!! It hasn’t done that for a long, long, time. The 64% year-over-year growth is just left over from the past. There was NO growth this quarter. It will never see 100% growth again. (My opinion only).

Saul

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Estimates put them at 4.000 transplants this year. Their 2028 goal is to do 10.000 transplants.

That’s roughly 26% CAGR from today over next 4 years. Unless they can meaningfully increase the price per transplant, that’s the revenue growth we can expect over the next couple of years.

International won’t be a growth driver until governments approve reimbursements, that will take years.

I had no position as I did the math above and the stock price around 150$ didn’t make sense when considering these factors and the limited TAM.

I like the company however as it’s starting to dominate the industry, long-term gross margins around 70% combined with their dominance should lead to 25-30% operating margins. If you couple that with 25% revenue growth, you get a nice compounder. I would be interested around 80-85$ a share (which it briefly touched yesterday AH but I was too slow).

Note: It is of course possible that they will achieve that 10K target sooner than 2028 and in that case, growth will be higher. I however don’t know the transplant market sufficiently to assess that likelihood and therefore rely on management estimates that are hopefully sufficiently conservative.

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Wow, I was not expecting to have to execute on this strategy so soon, but I have closed my Transmedics position. With last quarter having coming in at 114M, and the prior one at 97M, I was expecting upwards of 130M in revenue for this quarter.

The company has never really discussed seasonality before or emphasized this much variance in surgical procedures. The prior Q2 to Q3 earnings had large jump ups in revenue. It just does not make sense to me that people can not get a surgery because of summer vacation schedules. I am still not clear if it is the patients or doctors taking summer vacation; the company did not do a good job explaining the summer vacation theory in my opinion.

Next I am wondering why all the plane maintenance was scheduled for a single quarter which they call a one time cost. That seems like incredibly poor planning by management if it’s going impact 500 bps of margin for this quarter. Surely some of those plane maintenances could have been postponed a quarter? Or are the planes in such poor condition that repairs are essential immediately?

The problem with this company for me is they were traditional sandbaggers on guidance, but always crushed that guide and raised the guide. I would have really liked to see them say we are now processing the backlog of surgeries in Q4, but instead they are saying October is seeming to “normalize”.

I am good with taking responsibility for my decision to add on this one going into earnings. I liked that call because I was not seeing the deterioration in the business and did not share the concerns on TAM. Sometimes the results prove you wrong, and in this case I am pleased to turn my disappointment on these results into an opportunity to add to other positions that I would have liked to increase anyways.

This year I have success adding to positions to when the market was doubting, especially in companies like APP, ALAB, and NVDA which were trading down often for periods of time. I think the case like this with Transmedics where it actually may have been inside information leaking that was causing the selling, it a pretty rare occurrence.

Realistically there was also a possibility that a company with an acquiring eye was looking to acquire the company and was trading to depress the price. For example, Intuitive Surgical is a company with a 182B market cap and 4B+ cash on hand. Part of the reason I was not concerned about TAM was because medical devices company like ISRG do carry this big valuation.

In this case I was completely wrong about my prediction and the outcome. However, I believe the logic used by the board to identify this company in the first place is fundamentally sound.


The price fall of the stock when everything else I had was rising was making me very uncomfortable. As I pointed out in the Knowledgebase, sometimes selling is the most important thing you can do. (It would be good to reread that section).

@SaulR80683 I was curious is you could expand upon this part? It seems like a good strategy that a feeling of being uncomfortable owning the company is a strong warning sign that we either need to trim or sell the position.

Any thoughts about how your intuition led you to believe this was not just normal trading or variance in the market, but possibly a foreboding something was wrong with the TAM, or underlying business? Is it just the confluence of everything is else is up while TMDX was down every day, and this is an extremely rare type of price action? I know you have written in the past that you do not typically base decisions on price, but on the underlying business. I am still kind of surprised you sold in full before earnings, rather than trimming and seeing how the earnings played out.

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Hi wpr101, I have four posts already on this thread spelling out my thinking. That’s enough.

And as I write, it’s down over $40 more, and almost 32% from yesterday, after falling in several weeks from $178 to yesterday’s $126. Being able to admit to yourself that you might have been wrong, and to be willing to sell if indicated, is really important in investing.

Saul

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Commercial planes have a maintenance schedule set by the manufacture. These deadlines are hard requirements of the FAA, so its not something that can’t wait for. Buying all new planes or planes built around the same time can give you the problem that they all need maintenance at the same time. Majority of the planes TMDX owns are Embraer Phenom 300. The maintenance cycle for those planes can found at this page. That is just for the plane body and not the engines, which have their own maintenance cycles. I’m in the middle of doing a deep dive into the age of the planes and engines.

Yet again a problem for the average investor is data access. Transmedics planes can be tracked by any one with a little effort. Planes are required to broadcast their registration (tail number) during flight. While companies can opt-out of websites that use FAA data from being displayed. It does not stop enthusiasts who just receive the data and put it on to the internet. FAA has a new program that companies can opt-into that allow you to use a different code and you should be eligible to change that every 6-months with a goal down to 30 days. The problem with this is its easy for passionate jet-watchers to identify a plane with its new code. Just watch a plane take off and a new code is used its instantly correlated with that plane. If you really want to track Transmedics plane go to ChatGpt and ask it to write a python bot to record every trip a Transmedic plane takes. You then have data that 90% of the investors in the market don’t have. Here is an article on jet tracking.

I’m personally leaning away from investing in companies that I would have to write programs to keep up to date with their performance.

Drew

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I made a huge blunder here and added all the way up to earnings, given three straight years of earnings beats on conservative guidance. If it weren’t for NVDA being my top position, I’d be having another super dismal year after the SMCI debacle. That being said, I think it was a tell that the stock starting going down after Hassanein’s conference (Goldman Sachs?) a bit over a month ago. Usually stocks rise after one of these trunk shows, but he obviously said something that spooked them. And deservedly so.

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Some comments:
• I am long from late last week, based on the quality of some analysis of the membership whom I respect. Unfortunately, I also ignored the significance of warnings buried in my data base of financials on revenue growth and value risk compared with almost all other tickers held by the community over the past 8 months.
• In the past I mistakenly exited TSLA, NFLX, and some other growth tickers after major revenue related pull backs, so the pull back itself should not be the determinant, but indicators on the TAM and the company’s process to access it.
• This is a totally new industry, and short-term failures are part of maturity, A failure to meet guidance does not mean mgt. is incompetent, or a multi-bagger in the near future is not probable. Deliberate deception of stockholders however is a terminal event.
• I do not understand how the aircraft fleet became even a mentionable influence on revenue. TMDX was hypergrowth before they bot Summit, so earlier alternatives were always available. This appears to be an undefendable excuse and tips the assessment of mgt negatively.
Current thoughts/plan
• TMDX has created an exciting opportunity for humanity, which will expand in the future.
• TMDX has an enormous moat, so significant TAM is not going to captured by competitors.
• Changes in transplant technology should not remove TMDX opportunity, although it may change their process.
• The TAM is significant particularly considering global and organ expansion probabilities.
• Not sure if we were deliberately deceived, but I am going to give management a short rope.
• I am going to hold perhaps through the quarter.

Gray

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Since TMDX had grown to our biggest position this year and this recap will be out in a couple days anyway…

TMDX – TransMedics entered Q3 earnings under the same narrative as each of the past two years - an exceptionally strong first half with a flat second half guide due to anticipated seasonal softness. In both 2022 and 2023 TMDX overcame this softness and kept marching upward. The question was whether management could pull off the same trick in 2024. Unfortunately, the answer is no. TMDX posted a surprisingly disappointing $108.8M driven by lower sequential volumes in both the US and internationally. That’s the first sequential revenue decline in twelve quarters, which was before TMDX even launched its current commercial program.

The shortfall was driven by a nationwide decrease in US transplant volumes across the board. Heart and liver declined by 5% during Q3 with liver contracting 3%. CEO Walid Hassanein noted TMDX’s internal volumes matched national trends and repeated three times “we have not seen any fundamental or competitive dynamics playing any role in the slight sequential decline.” The CFO backed this statement by saying “While we did see a pause in our consistent sequential growth trajectory that we have maintained since our initial commercial launch, we believe this is short-lived and is more reflective of the overall U.S. national transplant volume and quarter-specific dynamics than a slowdown in our commercial momentum.” That’s small consolation.

Being honest, there’s not much to get overly excited about with this report. After having pretty much everything break its way the last 10-12 quarters, TMDX’s business momentum hit a surprising speed bump in Q3. Not only did revenue fall short of expectations, but management’s reiteration of the $425-445M FY guide broke a long string of healthy beats and raises. While management attributed everything to normal seasonality and variance, it is clear the severity of this slowdown was unexpected. In fact, after being pressed Hassanein admitted “maybe the headwinds in Q3 were slightly higher than what we anticipated.” If he would just replace “maybe” with “definitely,” I’d say he was spot on.

Hindsight is 20/20, but I’d feel better if management had only bumped the FY guide from $400M to say $410-$415M last quarter. As it is, jumping all the way to $445M is a major unforced error for what had previously been a consistently underpromise-and-overdeliver management team. What I can’t fully wrap my head around is why volumes dropped given standing waitlists for most organs. Management was clearly caught off guard by this. That makes me wonder whether the system might be further constrained somehow. While TMDX has lessened transportation concerns, is there something else in how clinics/surgeons/operating rooms/patients play off each other? If volumes are down across the board simply because of summer vacations by medical staff, is there a cap to how many surgeries can be completed regardless of how many organs TMDX can deliver? We already know TMDX’s tech outgrew the transportation infrastructure enough it bought planes to solve the issue. However, if it somehow outgrows the current surgeon infrastructure, the TAM (or more specifically the Serviceable Addressable Market) here might be even smaller than we thought.

Yes, management still expresses confidence in its overall plans especially the expected ramp in 2025. In fact, Hassanein was pretty feisty about it. However, this step down in revenue has certainly lowered and probably flattened the slope of TMDX’s previous growth curve. This quarter also illustrates TMDX is likely to be increasingly sensitive to fluctuations in overall US transplant volumes even as it continues to grab a larger part of the market. Given all that, I can’t say the street’s initial response to this report is unwarranted. TransMedics exits this report with a little less luster and a little more uncertainty.

As for our position, I ended up selling about 85% of our shares post- and then again pre-market at $95. The rest were covered by November calls at strikes between $140 and $170. I closed almost all those calls today for a comparatively small lick-my-wounds profit and will likely take a day or two to decide what to do with our remaining 2.5% allocation.

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To be totally honest, I’ve never seen such irrational reactions to a quarterly report here and on X. TMDX was only operating 10 out of 18 planes for the quarter and they did give some warning last quarter about the situation. To be clear, it was poor logistics management, and they need to fix that but a company that reports 64% revenue growth and re-states 84% yearly guidance should not be punished like this. With a solid beat, they are likely to grow 90% this year. Management is also stating they plan to go international and can expand into kidney, so I don’t think TAM is an issue. This reminds me when they bought planes 15 months ago and everyone freaked out and the stock tanked.
The small quarterly miss was a made-up analyst target (since they don’t give quarterly guidance) so it doesn’t mean much to me. If you trust management, this is a great buying opportunity for the long run and the path to 10K transplants. Much like META in 2022, we could be looking at asymmetrical returns over the next few years. TMDX NTM EBITDA multiple is roughly 0.5x higher than the expected EBITDA growth rate.

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In my opinion the maintenance on the planes is not the explanation here. That was already scheduled and incorporated in their guide (yes they kept the full year guide intact but that is a significant change from their usual guidance philosophy). The team got caught off guard and you could hear that very clearly from their comments. They anticipated a slower quarter but not too that extent.

I think it is pretty clear that they had just not enough “supply” as the market volume as a whole went down. The question is what Stock Novice highlighted well - why are they so dependent already on the market dynamics? I think the answer is simple and they said that also on the call:

“Importantly, we did not see any degradation of our market share or center penetration on all three organs. I want to make it crystal clear. We have not seen any fundamental or competitive dynamics playing any role in the slight sequential decline in case volume for OCS in Q3. Let me repeat it again, there has not been or we have not seen any fundamental or competitive dynamics playing any role in the slight sequential decline in case volume for OCS in Q3.”

While that is assuring in the way that there is no other technology winning against them, it also means they didn’t GROW market share significantly. So if the market volume goes down in a quarter (holiday, normal variability, etc.) and they don’t have significant market share gains, the outcome is what we saw this quarter. I don’t think more operational planes would have changed that outcome in a meaningful way.

The thesis for investing in Transmedics is based on two main assumptions in my view:

  1. Their technology leads to growth in the overall donor market therefore expanding their TAM

  2. They take share from other technologies such as cold storage or NRP because their product is superior in multiple ways

This was a quarter where both these key assumptions are not fulfilled to an extent as many investors had hoped for. Therefore the selloff - if this is overdone/a buying opportunity is totally depending on if this is a short lived hiccup or a change in the overall trajectory. The CEO himself got asked two times about the trajectory in the current quarter, he said this:

” We have seen the dynamic starting to normalize in early October. And that’s why we are reiterating the guidance that we set for ourselves.”

From all indications, if we believe that this was a national volume decline, we’re seeing that decline or that gap started to close up pretty significantly through the first few weeks in October.”

The translation of that is: yea it’s getting better but we are not yet in celebration mode, we will reach our full year guidance if it continues like that but don’t expect a blowout. At least that is what the tone of his voice indicated.

While I don’t think this was a thesis breaking quarter, especially taking into account their good execution up until now, this should probably be a lower allocation position and be monitored closely. (And in a very concentrated portfolio maybe not at all)

One last thing about investor psychology which probably also plays a role in that selloff: I think other investors also had some concerns similar to Saul’s - I think that, because I had them myself too before he wrote about it. So maybe some had positions that were to big (because of the convincing numbers they put out) for their actual conviction level which leads to some ugly price action when that conviction is tested.

Best Hannes

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I’d love to have more discussion about this.

Yes, and that warning still led them to be comfortable issuing a $445M top end guide. While some companies guide much closer to actual revenue, TMDX had never done that. It consistently followed a pattern of roughly extrapolating out the remaining quarters to issue a new “prudent” FY guide (i.e. roughly Q1 * 4 = FY guide for Q2; then Q1 + Q2 + (~2 * Q2) = FY guide for Q3; etc). Even with the warning after Q2, both the results and tone of this call suggest management got caught flat-footed. As I wrote above, if management had true visibility into this volume decrease, it would have made more sense to see the FY guide bumped to say $415 after Q2. That would have left room for a further raise to the current $425M at the low end. Almost all companies leave wiggle room for raises. TMDX has been no different the last three years. I view the fact all the wiggle room was eaten up this quarter as a clear miscalculation by management on where the numbers were going. It happened to NET. It happened to SNOW. I don’t see why TMDX is any different.

I don’t interpret it that way in its entirety. Management made it clear the shortfall was driven by a decrease in national volumes and not logistics issues. Even with an average of only 10 planes active, TMDX handled 61% of flights in-house versus 59% in Q2. That means it handled a larger volume of transport internally even with fewer planes. Assuming volumes didn’t drop, I would have expected management’s maintenance warning to show up as a lower % of in-house flights for Q3 and lower margins because of increased third-party transport fees. That’s not what happened. Everything I see suggests this was more an unexpected volume issue rather than logistics. Happy to hear differing opinions.

I agree with HannesRS. At the same time, this quarter has me thinking not about TAM but SAM. What if this is just about the limit of transplants the US medical infrastructure can cover in the summer months? TMDX already bought planes to ease the constraints of organ access toward their goal of 10,000 transplants. If there’s somehow a constraint on the availability of medical teams, that’s a whole different kettle of fish. The CEO didn’t like the line of questioning from analyst Suraj Kalia, but Suraj was certainly on the right track when pointing out “something gave this quarter.”

I’m not saying for sure there’s a doctor or facility constraint, but the unexpected contraction in volumes certainly raises the question. If management really anticipated this 5% and 3% drop, the updated guide after Q2 should have better reflected it. I don’t consider this management team either inept or unintelligent. Again, Hassanein’s “maybe the headwinds in Q3 were slightly higher than what we anticipated” is a telling admission. They messed up (I used a stronger word in real-time).

I left this call thinking the midpoint of $435M is probably the more realistic gauge. With the current numbers, TMDX will need to add $16M in incremental revenue to get to $445M. That might be a difficult task if this summer/holiday lag is truly going to be a thing at these higher base volumes. Again, I see this as a risk that wasn’t there prior to this report.

And that was a great time to buy. I did so back then and was quite happy with the results since I understood how the planes would directly eliminate a bottleneck and increase volumes. This stumble isn’t as clear cut (and Hassanein wasn’t nearly as confident in explaining it as he was the plane purchase). I do think I’m going to end up holding our remaining small position, but I don’t view these scenarios as equals from a thesis or potential buying standpoint.

Any way you look at it, it appears the path to 10,000 transplants just got bumpier. Unless and until TMDX proves otherwise, why isn’t a rerating down justified?

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That’s what I got from his comments too. He would have framed his response differently imo if they were currently on track to reach the high end let alone exceed it. And it seems the market is trying to price that in right now.

Interesting thought - and I don’t feel at all competent enough to find an answer. In general I wasn’t very satisfied with the lack of depths in mgmts explanation about the “volume slowdown”. I got the impression they aren’t very sure about a specific reason themselves as Waleed mentioned multiple times that the slowdown happened “across all 3 organs this summer at the same time” - it sounded like - hey guys we also don’t know what exactly caused this, but it’s unusual.

One other thing that came to my mind thinking about what could have negatively contributed was the comments from last quarter about the shift in focus from rapid broad adoption to going deeper into existing programs.

“And again, we feel extremely proud and humbled by the huge success and the rapid adoption. Now it’s time for us to dig in and go deeper and really secure these relationships and deepen these relationships”

That went from 98 in Q4 23 to 105 and 126 programs last quarter. No specific number was mentioned this quarter as far as I can tell…

Maybe that deepening did not go as smoothly as they thought? I feel I’m just lacking expertise in the area to adequately assess the situation and I would need to just trust the mgmts explanation here.

Thanks for all the opinions - helped me to reinforce my decision to only keep a little tracking position. I need more information to have more than best guesses about what’s going on.

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