Kestra Medical Technologies, Ltd. Common Stock 2027 Q1 Earnings Call

Thank you, Lateef. 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.

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 extractions. Shortly after fitting, the ASSURE system recorded more than 120 diverted therapies in one night, prompting immediate outreach from our Heart Alert Services team.

The team learned the patient was driving alone through rural Utah with his two 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 ahead 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 eight 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 turned 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 roadmap 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 three 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 wear compliance while increasing the productivity of the Kestra team supporting a rapidly growing patient base. Second, revenue access and collections, where automating intake, prior authorization, and reimbursement workflows can improve our fittings to claim conversion and collections while materially reducing administrative effort. 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. Increase rep productivity as measured by patient fittings per rep without requiring a proportional increase in head count.

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 in 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 is 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 under-penetrated the WCD category remains. As we have previously noted, despite the overwhelming evidence that an external defibrillation shock is effective at terminating dangerous 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 fittings 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 2027 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 Medical Technologies 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 healthcare 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 multi-year 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 non-invasive 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.

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 med tech 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.