Inspire Medical Systems - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue was $217.1M, up 11% year over year, and above S&P Global consensus; Adjusted diluted EPS was $0.45, beating consensus, while GAAP diluted EPS was -$0.12 due to one-time charges. Revenue consensus: $214.3M*; Primary EPS consensus: $0.20*.
• Management lowered FY2025 revenue guidance to $900–$910M (from $940–$955M) and GAAP diluted EPS guidance to $0.40–$0.50 (from $2.20–$2.30), citing a slower-than-expected transition to Inspire V, SleepSync implementation delays, and Medicare billing timing.
• Gross margin remained strong at 84.0% (Q2), with FY2025 gross margin guidance maintained at 84–86%.
• Call catalysts/narrative: transition headwinds expected to be temporary; CMS 2026 proposed OPPS increases for CPT 64568; DTC spend ramp in 2H; share repurchase authorization ($200M, Aug 11) and CFO transition announcement (Aug 26) add corporate actions to the setup.

What Went Well and What Went Wrong

What Went Well

• Revenue growth and profitability on an adjusted basis: Q2 revenue +11% YoY to $217.1M; Adjusted EBITDA $44.1M and Adjusted diluted EPS $0.45, both up vs prior year.
• Strong initial Inspire V feedback and efficiency: early studies suggest ~20% reduced surgical time; transitioned US centers saw >20% increase in implants vs 2024; management views Inspire V as a growth engine despite launch pacing issues.
• Gross margin resilient: 84.0% in Q2 despite a 100 bps drag from a $2.1M excess components charge tied to Inspire IV.

Management quotes:

• “The full launch of our FDA-cleared Inspire V system in the U.S. is an important milestone… strong positive feedback… simplified procedure and excellent patient outcomes”.
• “The broad enthusiasm for Inspire V gives us confidence that it will be a growth engine for the Company”.
• “We have our arms around the headwinds… actions are already underway to accelerate the adoption of Inspire V in the latter half of the year”.

What Went Wrong

• Launch pacing and operational headwinds: slower-than-expected US transition to Inspire V due to SleepSync implementation delays (IT approvals), contracting/training timing, and Medicare billing software updates only effective July 1.
• Guidance reduction: FY2025 revenue cut to $900–$910M and GAAP diluted EPS to $0.40–$0.50, reflecting transition timing and increased 2H DTC spend.
• One-time costs pressured GAAP results: $11.2M accelerated stock-based comp for retirement-eligible employees, $1.7M legal fees (DOJ civil investigative demand and patent suit vs Nyxoah), and a $4.0M non-cash impairment, driving a GAAP diluted EPS of -$0.12.

Transcript

Speaker 7

Good afternoon. My name is Dilem, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems Second Quarter 2025 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I'll now hand the call over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire Medical Systems. You may begin the conference.

Thank you, Dilem, and thank you all for participating in today's call. Joining me are Tim Herbert, Chairman and Chief Executive Officer, and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the three months ended June 30, 2025. A copy of the press release is available on our website. On this call, management will make forward-looking statements within the meaning of the federal securities laws. All forward-looking statements, including, without limitation, those relating to our operations, financial results, and financial condition, investments in our business, full-year 2025 financial and operational outlook, and changes in market access, 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. Accordingly, you should not place undue reliance on these statements.

Please see our filings with the Securities and Exchange Commission, including our Form 10-Q, which we filed with the SEC earlier this afternoon, for a description of these risks and uncertainties. Inspire Medical Systems disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, August 4, 2025. With that, it is my pleasure to turn the call over to Tim Herbert. Tim?

Speaker 3

Thank you, Ezgi, and thanks everyone for joining our business update call for the second quarter of 2025. I'll start by highlighting some key takeaways of our second quarter results. I'll then discuss our updated 2025 guidance and provide additional context and rationale around the change. Then Rick will provide a financial review. We will then open the call for questions. It has been an impressive start to the year 2025, and we have achieved many key milestones. That said, I want to provide some important context on the challenges we are facing in the commercial rollout of our Inspire 5 next-generation system, which began in May. As the quarter progressed, we encountered certain headwinds that slowed our efforts to transition customers to Inspire 5.

While we are disappointed with the elongated timeframe we now expect for the rollout, we remain focused on advancing the transition of our customers to Inspire 5. To this end, we are taking concrete actions that we believe will allow us to complete this transition in the next few quarters. Strong market demand, positive patient and surgeon feedback, and favorable clinical results give us conviction in our platform and ability to make a difference in the lives of our patients with obstructive sleep apnea. I'd now like to provide some detail regarding the challenges faced during the quarter and the steps we're taking to actively address the factors at play. First, in the second quarter, many centers did not complete the training, contracting, and onboarding criteria required prior to the purchase and implant of Inspire 5. Specifically, implementation of SleepSync has been the most challenging step to accomplish.

Although not technically difficult, the approval process from our customers' IT departments has taken longer than expected. Additionally, some centers have been delaying implementing SleepSync until their first patients are scheduled to receive the Inspire 5 device. To increase the rate of implementation of SleepSync by our customers, we began and continue to leverage our technical teams. To date, we have completed the implementation at over 50% of the U.S. centers. With these technical resources fully engaged, we expect to complete the vast majority by the end of the third quarter. As an aside, most of the units sold in the second quarter were Inspire 4s. Therefore, we did not experience much inventory destocking in the second quarter. The burn-down of Inspire 4 inventory will remain a headwind in the second half of 2025 as we continue the transition to Inspire 5.

The second challenge related to adoption of CPT Code 64568 for Inspire 5 for Medicare patients. The approval of the code change was announced in April with a retroactive effective date of January 1, 2025. However, the software updates for claims, submissions, and processing did not take effect until July 1. Thus, although traditional Medicare and Medicare Advantage patients could receive Inspire therapy, implanting centers would not be able to bill for those procedures until July 1. Given this dynamic, many centers continued to treat Medicare patients with Inspire 4. With this software update now complete, we anticipate centers will ramp up their efforts to transition to Inspire 5. Third, certain patients opted to wait for the Inspire 5 device, knowing its availability was imminent, instead of being treated with Inspire 4.

As more centers transition to Inspire 5 into the third quarter, these patients should start receiving Inspire 5 therapy. Fourth, we intentionally held off on patient marketing and education spend and footprint expansion, namely new centers and territories, in the first half of the year. This was a strategic decision given all the resources required for the Inspire 5 transition. As we move into the second half of the year, we have ramped up both marketing and footprint expansion efforts to increase patient awareness and build capacity across the U.S. These investments have already started to be implemented, and we have already experienced an increase in website activity, calls into our advisor care program, and appointments to healthcare providers. We continue to leverage our ACP to connect patients interested in Inspire therapy with qualified physicians, including through the expansion of digital scheduling.

In addition, we are ramping our medical education and local community health talk efforts to promote the launch of Inspire 5. These efforts should provide a tailwind into the second half of 2025 and beyond. Lastly, we believe some patients may be delaying Inspire therapy to try GLP-1 therapies. We are unable to quantify this and continue to believe GLP-1 therapies present a tailwind long-term, as we do hear of patients losing weight to qualify and receive Inspire therapy. As an example, when a prospective patient fails the DICE procedure due to complete concentric collapse, our centers work with the patients to help address their high BMI, including prescribing a GLP-1.

As a result of these headwinds, we are adjusting our full-year revenue guidance to a range of $900 million to $910 million from our previous revenue guidance of $940 million to $955 million, or a 4% reduction at the midpoint. The new revenue guidance reflects growth of 12% to 13% over 2024 revenue. We are also reducing our diluted net income per share to a range of $0.40 to $0.50 from our previous guidance of $2.20 to $2.30 per share to reflect this change in revenue guidance and, to a lesser extent, the planned increase in patient marketing costs for the second half of the year. I will now take a few minutes to highlight the success we have already seen with the Inspire 5 system and what to expect moving forward.

The early results of our Singapore clinical study have been presented at the recent sleep meeting and demonstrated a 20% reduction in surgical times. This reduction will provide for increased capacity at centers. In fact, we have already noted that the U.S. centers that have completed the transition to Inspire 5 have experienced a more than 20% increase in patient implants in the first half of 2025 as compared to the same period in 2024. From an efficacy standpoint, the accelerometer study we highlighted at recent investor conferences suggested significantly improved sensing capability, including an 86% inspiratory overlap with a patient's breathing. Synchronization with respiration is essential as the airway collapses during the inspiratory phase of respiration. The early review of AHI reductions appears very promising as well, and we plan to present this data at the upcoming ENT meetings in October.

Regarding reimbursement, CMS recently released the 2026 proposed OPPS rules, which, if approved, would provide positive increases for Medicare reimbursement for the Inspire system. As you know, for Inspire 5, centers will be billing CPT Code 64568, which has been accepted for plans covering over 90% of our 300 million covered lives, including Medicare. The national average Medicare hospital reimbursement for CPT Code 64568 is proposed to increase to $32,000, up roughly $1,300 or 4% from 2024, and the ASC reimbursement is proposed to increase to $28,000, up $1,300 or 5% compared to 2024. Finally, the surgeon reimbursement for CPT Code 64568 is projected to increase to $660, up 11% as compared to 2024. Should the proposed rules be finalized as expected in early November, the new reimbursement would take effect January 1, 2026.

With respect to clinical evidence, we are very excited to have submitted the predictor manuscript to a leading journal and expect it to be published later this year. As a reminder, the clinical evidence proposes an algorithm which uses BMI and neck circumference to determine a patient's eligibility, thereby eliminating the need for a DICE procedure for the vast majority of patients. We're also excited to announce that we became a corporate champion of the American Academy of Otolaryngology. The sponsorship positions Inspire as a leading voice in ENT innovation, aligning with top thought leaders and decision makers. It also strengthens our brand and trust within the ENT community, which is vital for expanding Inspire's influence and adoption. It also provides a platform for collaboration in research and policy, thereby advancing Inspire's market leadership in hypoglossal nerve stimulation.

Before I turn the call over to Rick, I'd like to take a moment and discuss the personnel announcement we made today. No one has lived up to our commitment to delivering strong patient outcomes more than Randy Ban, our Executive Vice President, Patient Access and Therapy Awareness. Randy recently announced his intention to retire at the end of January 2026. As one of our earliest team members and a long-time commercial leader at Inspire, Randy has played a significant role in advancing access to Inspire therapy and building a strong, mission-driven organization. He will remain fully engaged in his current role into early next year to support a smooth and thoughtful transition. We are grateful to Randy for his many contributions and wish him the best in his well-earned retirement. At the beginning of this year, Carlton Weatherby assumed the lead of the U.S.

sales and marketing teams and will continue to build upon the robust history of growth in the adoption of Inspire therapy initiated by Randy many years ago. In summary, we remain focused on the patient to continue the growth and adoption of Inspire therapy. We will execute our growth strategy of driving high-quality patient flow and increasing the capacity of our provider partners to effectively treat and manage more patients. Our key strategies include training advanced practice providers, certifying additional surgeons qualified to implant Inspire therapy, and driving the adoption of SleepSync and our digital tools, all of which are embedded strategies in our commercial team's objective to increase provider capacity. Looking ahead, we are confident about our future and that we have the appropriate strategy in place to drive long-term stakeholder value.

We have our arms around the headwind that I described, and actions are already underway to accelerate the adoption of Inspire 5 in the latter half of the year. Looking beyond 2025, we continue to take actions to position the company for strong, profitable growth. With that, I'd like to turn the call over to Rick for his review of our financials.

Speaker 7

Thank you, Tim, and good afternoon, everyone. Total revenue for the quarter was $217.1 million, an 11% increase from the $195.9 million generated in the second quarter of 2024. U.S. revenue in the quarter was $207.2 million, an increase of 10% from the $187.8 million in the prior year period. Revenue outside the U.S. was $9.9 million, which was a 23% increase year over year. Gross margin in the quarter was 84% compared to 84.8% in the prior year period. The year-over-year decrease was primarily due to a $2.1 million charge for excess Inspire 4 subcomponents, which reduced gross margin by 100 basis points in the quarter. Total operating expenses for the quarter were $185.7 million, an increase of 15% as compared to $160.9 million in the second quarter of 2024.

This increase was primarily due to the expansion of our sales organization and increased general corporate costs, partially offset by a reduction in R&D year over year. In addition, operating expenses included accelerated non-cash stock-based compensation expense of $11.2 million for employees who are now retirement eligible in accordance with the implementation of changes to the treatment of equity awards upon an employee's death, disability, or retirement. Operating expenses also included $1.7 million in legal fees related to a civil investigative demand from the Department of Justice and a patent infringement suit that we filed against a potential competitor. These items do not reflect costs associated with our ongoing operations. Please refer to our earnings press release for a reconciliation of these items. Interest and dividend income totaled $4.5 million in the quarter compared to $5.9 million in the prior year period.

Operating loss for the quarter totaled $3.3 million compared to an operating income of $5.1 million in the prior year period. Net loss for the quarter was $3.6 million compared to a net income of $9.8 million in the prior year period. This represented a loss per share of $0.12 for the quarter compared to a net income of $0.32 per share in the second quarter of 2024. Adjusted EBITDA for the quarter totaled $44.1 million, which is a 14% increase compared to $38.7 million in the prior year period. The adjusted EBITDA margin in the second quarter was 20% and consistent with the second quarter of 2024. Adjusted net income per share totaled $0.45 compared to $0.32 in the prior year period, or an increase of 40% year over year. The weighted average number of diluted shares outstanding for the quarter was 29.5 million.

We ended the quarter with $411 million in cash and investments. Our strong cash position allows us to remain focused on executing our growth strategies. Moving on to 2025 guidance. As Tim mentioned, we now expect full-year revenue to be in the range of $900 to $910 million, down from $940 to $955 million, representing an annual increase of 12% to 13% compared to full-year 2024 revenue. We expect Q3 revenue to increase 1% to 3% sequentially from the second quarter as we continue the transition to Inspire 5. We continue to expect full-year gross margin to be in the range of 84% to 86%. We now expect diluted net income for the full year 2025 will be $0.40 to $0.50 per share, a decrease from our previous range of $2.20 to $2.30 per share.

The reduction is primarily due to the revised revenue guidance and, to a lesser extent, the planned increase in patient marketing costs for the second half of the year. We ended the quarter with 348 U.S. territories and 259 U.S. field clinical representatives. We continue to expect our reported tax rate in 2025 to be roughly 10%, primarily related to state and local taxes. We expect the full-year diluted shares outstanding to be approximately 31 million. With that, our prepared remarks are concluded. Dilem, you may now open the line for questions.

Speaker 6

Thank you. As a reminder, to ask a question, you will need to press *11 on your touch-tone telephone. To withdraw your question, please press *11 again. We ask that you please keep your questions to no more than one question and one follow-up. If time permits, we'll be more than happy to take more questions. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Adam Maeder from Piper Sandler. Please go ahead.

Hi, good afternoon. Thank you for taking the questions. A couple from me. The first one is on the revised guidance, and you guys outlined a handful of different headwinds that are facing the business here. I was just hoping to get a little bit more color there if you could kind of put some force rank order around those different items or quantification around those items so we can kind of understand those different components and how you're thinking about the potential impact in the second half of the year and the night of follow-up. Thanks.

Speaker 3

Sounds great, Adam. How are you doing? Good to hear from you. I think when we laid out the four key items that we highlighted, the first two are really the predominant factors that we had. The first one certainly being the number of centers that have completed their full training and adding SleepSync to their systems to be able to use the Inspire 5 programmer. The second is really the concern over billing Medicare, which is everybody was aware of it being approved, but not being able to bill it until July 1 has really put some centers in a tough spot, and they chose to continue to implant Inspire 4. Those two factors really are the predominant drivers, and we really got our arms around both of those.

Of course, the Medicare is now approved, and centers are able to bill CPT Code 64568 for Inspire 5, and we have a full team working to get all the other centers trained and up and running. As we mentioned, over 50% of the centers have already had access to SleepSync.

That's helpful to color, Tim. Thank you for all that. For the follow-up, I'm going to test my luck on 2026, and the rollout obviously going slower than expected with Gen 5 here this year. You gave some kind of helpful color around kind of how you're thinking about the trajectory in the back half of the year. Maybe to ask it a little bit more directly, would you expect revenue in 2026 to accelerate over the 12% to 13% that you've guided to in FY25?

Absolutely. We are going to provide our next year's guidance, of course, at our year-end call. We are making several investments, as I've already mentioned, to get the sites up and running with Inspire 5. We talked about the increased marketing with our direct-to-consumer spend, expanding our footprint both with new centers, with surgeons bringing back some of the surgeons who weren't doing as many procedures because of the pressure sensing lead with Inspire 4. Yes, we would expect our revenue growth to exceed the 12% to 13% we're talking about now.

Thanks very much.

Speaker 6

Thank you. I show our next question comes from the line of Travis Steed from Bank of America Securities. Please go ahead.

Hey, thanks for taking the question. I wanted to ask about the EPS guide change. I know the numbers in the press release, the $220 to $230, went to $0.40 to $0.50. There was, I guess, a $0.57 one-time charge this quarter, but trying to get the bridge kind of back to the underlying EPS guide and on an adjusted basis, if you could kind of help walk how the guide changed versus the $220 to $230 that you gave last quarter.

Speaker 0

Sure. Hey, Travis. The most significant item there is just the gross margin that we're going to, the reduced gross margin that we would obtain had we had higher revenue. Really, the biggest impact there is the reduction of the revenue guide from our previous midpoint of $948 million down to $905 million. That's the majority of that. We are also increasing our DTC spend too. To a lesser extent, there's some impact there from continued investments. The big driver there is that we expect to actually increase our DTC investments significantly now that we've gotten the launch underway. Part of that launch is we want to take advantage of the launch with Inspire 5 to ensure that we're building patient awareness. That growth, we had DTC at $95 million in 2024. Expect that to be over 20% growth, which implies about $115 million in 2025.

The $0.40 to $0.50 EPS guide is excluding the $0.50 to $0.57 one-time charge this quarter, just to be clear?

No, that's included. It's GAAP EPS. It's inclusive of that.

Okay. If I take the $220 versus $230, subtract the $0.57, that should be the underlying EPS guide, right?

Yes, because you have the original, the underlying guide is a midpoint of $0.45, roughly $1.20 for the reduction in revenue, and then the roughly $0.60 for the one-time items. Yes, correct.

Okay. Just want to make sure that was clear since it's confusing for a lot of people. The second question I had was just on the Q3 guide and any kind of view on June/July trends that kind of helped inform that Q3 guide up 1% to 3% sequentially. Thank you.

Speaker 3

Hi, Travis. No, I think as we come out, it's always a little bit lower at the beginning of a quarter, especially when you're talking about the beginning of July. We do see the patient flow that we're working through in the second quarter and be able to get a handle on where we are from patient flow and expected implants to be able to guide a 1% to 3% step up over the second quarter revenue. Those are just the early views that we see from the patient flow.

Okay, thanks a lot.

Thank you, Travis.

Speaker 6

Thank you. I show our next question comes from the line of Danielle Antalffy from UBS. Please go ahead.

Hey, good afternoon, guys. Thanks so much for taking the question. I just want to make sure I understand what's happening here on underlying volume trends. Appreciate all the color you provided, Tim. I guess even if it's a matter of like slower transition to Inspire 5, volumes seem to be lower than what, certainly than what you guys have been tracking over the last few years, but you know, than what a lot of people expected. I guess some of that is, you know, patients choosing to wait. I guess I'm just curious, like why you're still seeing such pressure on volumes? I know it's hard to quantify like the GLP-1 impact, things like that. Anything you can say there to just give us some more confidence that this is truly temporary and not, you know, not something structural in the market would be great.

Sorry, I know that's an open-ended question, and I'll just leave it at that.

Speaker 3

Thanks, Danielle. First off, in the second quarter, we did achieve expectations with our revenue and taking care of patients. We did have a good patient flow there to achieve what we set expectations or set guide to be in the second quarter. As we look forward, knowing the delay in getting all the centers up and running, that pushes our cases forward. It also limited our ability to increase the footprint. We didn't add as many centers in the second quarter as we were working on the transition. We didn't add as many territory managers as we noted in the script. We did increase the number of field clinical reps because that builds the capability to move forward. As Adam asked earlier on, the two key factors are getting the sites up and running to transition to Inspire 5 and really the ability to bill Medicare.

Centers really had a difficult time billing Medicare, knowing that they wouldn't get billing accepted until July 1. The other two factors do play as well, of course, with the patients who are expecting or waiting for Inspire 5. Until their centers are up and running, they certainly can't get in the queue to be able to get scheduled for that. We know those patients are there. Finally, with the majority of the units being sold in the quarter being Inspire 4, we still have a burndown of inventory that will carry forward, moving forward. We have strong confidence in our ability to move forward. That's really highlighted by the great performance that we're seeing with the Inspire 5 device so far, both in the U.S. and, as we mentioned, from the clinical study in Singapore.

We're going to be proud to present some more of those results at the upcoming ENT meeting. The team's got their head down. They're working hard. We think we got our arms around the headwinds limiting the Inspire 5 transition and have good confidence that we have the corrective actions in place to be able to overcome those.

Okay, thanks for the comprehensive answer.

Thanks, Danielle.

Speaker 6

Thank you. I show our next question comes from the line of Robbie Marcus from JPMorgan. Please go ahead.

Oh, great. Thanks for taking the questions. Two for me. First one, Tim, I appreciate you're not commenting on 2026. Would the expectation be, given this is a transient issue, that you'd basically go back to your prior run rate in 2026, meaning you'd get back the $40 to $45 million in revenue cut that you had here, in 2025 next year if it's not demand-related?

Speaker 3

I think that's what we're going to be targeting for. I think that we do think this is a short-term issue, and with the shift, it limits our ability to work through Q3 and Q4, but it does set us up for a very promising 2026 and beyond as we need to be focused to get all the sites transitioned over. We already have the payers in place, as we mentioned, with the CPT Code 64568. We have Medicare reimbursement now in place, and we have seen positive experience from centers that have already implemented Inspire 5. Again, we're going to give the formal guidance when we move forward, but our intent is to bring the growth back. Absolutely.

Great. Maybe, just to follow up, you've had approval for a long while now. You were in limited launch for many months. The launch isn't going according to plan. What would you say if you compare now versus on the first quarter call, which was partway into the second quarter? What exactly didn't go to plan? What was the biggest delta versus expectations?

Sure.

How do you plan to fix those shortcomings through the rest of the year?

I think it's, this is the largest launch in the history of the company. There's no question about it. It's one of the largest launches in medtech, based on where we are today. There are challenges that go with it. At the beginning of the year, really, we're focused more on making sure we had sufficient inventory to be able to even start the launch. We're really limiting the number of centers that could be exposed to Inspire 5, still being able to pick up enough data to have confidence moving forward in the rollout. As we got to May, when we did the full launch and started to roll it out, we did have the opportunity with the extended time to be able to get all the reimbursement in place. We did have Medicare approved, although when they do their documentation, they do it twice a year.

Of course, we weren't part of the January release, knowing we had to wait until the July release had one issue. That's a timing factor. The SleepSync is really the big change too because that gives us the advantage to be able to capture the information when physicians do the device programming. That's really a long-term opportunity to build the robustness of the Inspire system. It is a complex launch. I think now we have our arms around it. I think having inventory earlier would have allowed us to release this earlier, albeit we still would have been constrained from a Medicare standpoint. We do take it to heart and do look closely at a lot of the details.

When we go into our programs, moving forward on what can we do to enhance that going forward and have some better planning to address some of the challenges that we've seen.

Appreciate it. Thanks, Tim.

Thanks, Robbie.

Speaker 6

Thank you. I show our next question comes from the line of Richard Newitter from Truist Securities. Please go ahead.

Hi, thanks for taking the questions. Just a couple here, and I'll list them all up front. I'm curious, you know, if you could just parse out a little bit more clearly for us, is this entirely Inspire 5 execution related? And that's the transient item that gives you confidence here for moving into 2026. You did call out GLP-1 impact, a little bit more concretely than you have in the past. I'm just trying to understand between that and maybe capacity utilization, you know, what's potentially, you know, nearer term transient, and then what's related to those other items? Anything you can give us on kind of underlying demand, trends, since there is inventory in the channel. Sorry, two more. Your accounts receivable stepped up. I just wanted to know kind of how that factors into some of these, some of these considerations.

Lastly, you talked about a 20% increase for Inspire 5 users that have adopted in the first half. I'm just curious what's driving that. Is that patients that just aren't able to get Inspire 5 that they found the few physicians who have them going there, or is it actually throughput increases and physicians doing more procedures on their planned Inspire days? Thank you.

Speaker 3

You bet, Rick. Got it. Okay. Start with number one, Inspire 5, transition. Is that really the overriding element that's limiting patient flow? I think we had good patient flow in the second quarter, and we achieved the expectations that we set forward. It was the continuation of the patient flow going into the third quarter. While the Inspire 5 is the leading issue there, there are underlying elements to it. Obviously, the four items I talked about with the Inspire 4, specifically sites being ready to go with 5, the Medicare, some patients waiting for the Inspire 5, and of course, the burndown of inventory. We also held back, remember, a little bit on our DTC and a little bit on our footprint expansion.

Not purposely going out and adding a lot of reps, making sure that the team stays in place, focus with existing centers, get them transitioned to 5, and then turn around and really start to expand that. That specifically is what we started here in the third quarter, not just increase DTC, but an increased focus on building the footprint in the U.S. We'll come back to, that's going to grow, capacity. No question about it. GLP-1 impact, we're going to keep watching that closely. We do think that as the indication has come out, we may see pockets of that, with some of our centers of patients wanting to trial a GLP-1. We've talked about that with you before. We do think that's a real tailwind into the future. It's really about helping patients lose weight, addressing their lateral wall collapse.

We don't think that's a significant impact, but we're watching that very, very closely. I'm going to skip by accounts receivable to give that to Rick and go down to the third question, which is the 20% improvement in patient flow with implants with our physicians. These are with our limited release sites. This is patient implant. This is patient flow. Those are real numbers. We're tracking their implants during the first half of 2025 versus the first half of 2024. These aren't new centers in 2024. These are centers that had full year 2024 as well. It's a true apples to apples. It's a reduction in the surgical complexity of 5 that allows them to improve their capacity.

More importantly, Rich, it's about them not having to put in the pressure sensing lead because, as we remember, that sensing lead into the thoracic, not into the thoracic cavity, to the intercostal muscles is part of the surgery that is just not the most comfortable part for ENTs. That really has been the number one primary, positive feedback. That being said, I'm going to back up to number two and ask Rick to comment on accounts receivable.

Speaker 0

Yeah, Rich. The accounts receivable increase is really a twofold item. The primary driver there is, in May, we actually completed a transition to a new customer billing service that helps automate and streamline our billing process, which is an upgrade from our previous manual billing process. With that implementation of the new system, we had a temporary delay in the delivery of customer invoices, actually, with the new portal and our new automated delivery process. That temporary delay has been resolved, and we expect to have this fully remediated in the third quarter. It's really just a timing. We'll get those collections here, as we get into the third quarter.

To a much lesser extent, too, the second quarter was a little back-end loaded in the fact that we had a really strong June, and that also contributed to the increase in accounts receivable balance at the end of the quarter.

Speaker 6

Thank you. I show our next question in the queue comes from the line of David Rescott from Baird. Please go ahead.

Great. Thanks for taking the questions. Rick, you answered the question earlier, but I wanted to just make crystal clear, you know, the updated EPS guide for the year, the $0.40 to $0.50 that's now in the guide relative to the prior $2, $2-plus guide. Is that $0.40 to $0.50 relative to the negative $0.02 of net income per share or relative to the $0.55 of adjusted net income per share you've delivered year to date so far? I guess based on that answer, are you expecting, you know, incremental stock-based comp for this retirement component in the back half of the year as well? I have follow-ups.

Speaker 0

Yeah. To your first question, it's relative to the $0.02 earnings per share to address your first question. The implementation of the retirement policy was really a one-time charge, and we expect our stock-based compensation to revert back to traditional levels as a percentage of our revenue going forward.

Okay. That's helpful. Tim, you called out maybe three or four or four or five components of this lowered outlook for the year. I'm curious if you can bucket it in so much as to the progress that those have recovered either in June, in the back half of the quarter, or already in July. Just based on some of the trends that you're seeing in the back half, where we kind of stand from a, "Hey, are some of these headwinds bottoming out? Are they on the up at this point?" Any color there would be helpful. Thank you.

Speaker 3

Absolutely, David. The first two, the primary contributors, as we mentioned, the first one being the centers being up and running. Remember, we had to do the training, contracting, and implementation of SleepSync. We mentioned SleepSync is already adopted in 50% of the centers. Training is already complete because the training of surgeons is relatively straightforward, right? Don't implant the pressure sensing lead anymore, and it's a little bit more streamlined. Contracting is even above that of implementation of SleepSync. We really got our arms around those three elements of getting centers up and running. I think we're in a good position there with a strong focus from the team. Number two, of course, is Medicare, and that is complete, right? We do have the new code 64568 approved by Medicare. The documentation is complete.

The software is updated, and Medicare is accepting billing for Inspire procedures to that new code today. That one is complete. The rest of them will keep coming as we keep expanding. Beyond that, we are working diligently to increase the footprint again, to add additional centers, to train additional centers. Maybe those physicians who weren't as excited about implanting the pressure sensing lead, that creates an opportunity for us. The team is really leaning in on that. We think we have our arms around that as well and look forward to continuing to report back on that.

Speaker 6

Thank you. I show our next question comes from the line of Michael Sarcone from Jefferies. Please go ahead.

Good afternoon, and thanks for taking the question. I guess just first, Tim, to follow up on the Medicare billing and software update. You said that's been available since July 1. Could you give us any sense of what kind of uptick maybe you've seen since July 1 now that these centers are able to bill Medicare?

Speaker 3

Pretty limited early in this quarter so far in that we had to get the sites up and running before they're in a position to bill it. A lot of sites weren't even going through the full implementation process until they're able to really step in. Now that Medicare is in place, we can say that's no longer a barrier. Now we get to lean in with a lot of those centers. Hence, that's really kind of the push into the third quarter here that's driving a lot of the guidance changes.

Great. That's really helpful. A follow-up on the growth in the accounts that did transition to Inspire 5. You said over 20% growth, 1H25 versus 1H24. Could you just talk about the phenotype of those accounts and the characteristics? Is there any reason why we shouldn't expect that analog to hold for kind of the average account for Inspire?

Good question. I think the key is when we look at the accounts that were in our limited market release, obviously, these are accomplished centers. When we can see that kind of growth in the accomplished centers, the high-volume centers already, we want to use that to translate across the board into other centers to be able to show that kind of growth going forward. We can use that as an example with centers to show that capacity increases by the reduced OR time and the ease in doing the programming with these patients. Yes, we want to reflect that across other centers as well, and we'll communicate that to the centers and to our team.

Great. Thanks, Tim.

Thank you.

Speaker 6

Thank you. I show our next question comes from the line of Shagun Singh from RBC. Please go ahead.

Oh, great. Thank you for taking the question. I wanted to get a better sense of the implied Q4 guide. It assumes a substantial step up from Q3 to Q4, about 20% growth. Just what is your confidence in that number, you know, and that it won't be pushed into 2026? Any assumptions you can quantify for that would be helpful. On Q3, I think somebody asked the question earlier, but can you give us a sense of volume growth that you've seen in July? Specifically, how many accounts have been converted? Lastly, have you heard any pushback from customers around profitability? Thank you for taking the question.

Speaker 3

I'll go backwards. No, we haven't really seen any pressure from centers on profitability. I think that the new Medicare rates, the OPPS rules coming out, that really helps that off quite a bit. I think the CPT Code 64568 gives a little bit better reimbursement for ASCs, and that steps up again quite well going into 2026. It's really not any, too much pressure from that standpoint. Second question was? I'm sorry, Shagun, what was the second question?

I was just wondering if you can comment on the Q4 guide, any quantification you can provide, and then also on July specifically, anything you can share on volume growth.

Yeah, I'm not in a position to really comment too much on the early July as we're new into the quarter right now. We did talk with Michael on the last question, in regards to really leaning in to really get the other centers kind of up and running. When we look at the fourth quarter, remember, that's our big quarter. That's the one where we have our seasonality because of the high deductible insurance plan. If you kind of look historically, we always get a pretty good step up from Q3 to Q4. When we set our guide this time, and we talked about the 1% to 3% step up from Q2 to Q3, and then what we would expect through Q3 to Q4 with that seasonality, that's how we set that overall guidance.

Thank you.

Thank you.

Speaker 6

Thank you. I show our next question comes from the line of Anthony Petrone from Mizuho Financial Group. Please go ahead.

Speaker 0

Thanks. I'm going to go into three quick ones, rattle them off on some of the headwinds here. One is capacity, and then you talked about SleepSync and then GLP-1. On the capacity side, maybe just an idea of where general surgeons can be as a channel heading into 2026. On SleepSync, can it be fully up and running to all accounts by the end of the year? If so, what does that do in terms of unlocking channel? A failed DICE, going to GLP-1, how often does that happen? In the experience so far, have you gotten any of those patients back at this point? Thanks.

Speaker 3

Absolutely. Good question. Thank you. From a capacity standpoint, the first step that we're doing is with existing centers and making sure that they understand the improved capacities with Inspire 5. We just talked about the demonstrated over 20% increase already in the sites in the limited market release. We do think that the next step is going to be added ENTs, both those that were reluctant to do procedures based on the pressure sensing lead or those that were trained and really haven't really engaged and done a lot of procedures. We believe the pressure sensing lead has a factor in that and that we can improve it. We can move forward and talk about both oral surgeons who do maxillomandibular advancements and even general surgeons. Now that we don't have that pressure sensing lead, it can lend to improved adoption by general surgeons.

We do have a few that are already doing that and quite successful with that. Going to your second question on SleepSync. SleepSync is a long-term view. It's our cloud-based patient management system. It is what is going to provide improved patient outcomes because it's going to help sleep physicians with the monitoring and programming and care of their patients from a longitudinal standpoint. Having that as part of the Inspire 5 system is another conduit to be able to have data into the SleepSync overall. It is a very important part of it. Yes, we plan to have the majority of the sites all up on SleepSync. Every site who will be doing Inspire 5 will be up on SleepSync. There may be a few sites that will continue with Inspire 4, but I think the great majority of sites will have SleepSync implemented.

That really provides a long-term benefit both to the centers, especially to the patients because we can monitor their outcomes. Of course, for Inspire because it is a competitive edge as well. Finally, GLP-1s, the failed DICE. As you know, with the predictor study, we're saying that we now have an algorithm for patients who have a BMI less than 32, that we can use the BMI of 32 and a neck circumference to predict their qualifications for Inspire and therefore eliminate a sleep endoscopy for those patients with a higher BMI. When you start to get a BMI up at about 35, it could be as high as 50% of patients would have a large enough neck circumference to have complete concentric collapse.

Those patients need to lose weight so we can reduce the lateral wall collapse and be able to treat them with a tongue-based collapse or hypoglossal nerve stimulation.

Speaker 6

Thank you. I show our next question in the queue comes from the line of Chris Pasquale from Nephron Research. Please go ahead.

Thanks. I had a couple of—Tim, I want to start off just taking a different spin on Shagun's question. To your point, up low single digits in 3Q, then up 20% plus in 4Q. That's very similar to what we've seen the past couple of years. I guess my question is, should this year follow the typical seasonality? It seems like many of the headwinds you called out are going to be peaking here in 3Q. It's going to take you some time to realize the benefit from ramping back up the DTC spend. Why shouldn't we expect 3Q to be weaker than usual and then maybe even have a steeper ramp in the year-end than we might typically see?

Speaker 3

Sure. I think what we said in Q3, it's going to be about 1% to 3%. Historically, if you kind of look at it, it's usually a little bit higher than that maybe coming out of Q2. It's a little softer in our guide, as we mentioned. We put the consistent step up going into Q4. The key is going to be we just need to keep focused on the corrective actions that we have in place and all the actions to be able to get the patient flow going. You're correct. The DTC does have more of a longer-term impact both into Q4 and, of course, setting up for 2026.

Okay. You said you haven't heard a lot of pushback on reimbursement yet. One of the things that we have heard from some high-volume physicians is that the lower payment rate for Medicare patients under the new CPT Code 64568 makes it less attractive for them to treat that population. They're thinking about de-emphasizing that cohort in their own practice. How confident are you that everything we're seeing here is really just a matter of getting all the pieces in place so that it's easy to do the billing and not a broader issue around those patients getting served?

That's a good point. We need to continue to communicate that the difference between the old code 64582 and the new code 64568 did have a $200 Medicare gap. We also think that's reflective in the work that they do not have to put in the pressure sensing lead, so it is a reduction in time. The reimbursement per minute for the high-level implanters, the experienced implanters, will be a wash. The good news is with the OPPCS rules coming out, there's a $600 increase in 64568. There was a slight decrease in 64582. We're not too concerned about that. That needs a little bit more review, but it really has significantly reduced that gap. Nonetheless, with an increase to $660 proposed with 64568 and with the experience that they can get with a reduced OR time, it should increase their capacity.

We believe, and as we've shown with our initial sites, patient flow and implant volume has increased over 20% with the first limited market release site. I think we'll be able to work with the surgeons, communicate that, and get their commitment to take care of patients.

Speaker 6

Thank you. Thank you. I show our next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.

Hi, good afternoon. Thanks for taking the question. Hey, Tim. I think some of us, maybe just me, might be struggling to understand how the delay in Inspire 5 negatively impacted Q2 because Inspire 5 doesn't really have a clinical benefit over Inspire 4. I wanted to run the factors that impacted Q2 that I heard on this call by you to see if I'm missing anything. Q2, it sounds like, was negatively impacted by patients who are waiting for Inspire 5, one, some burning down of Inspire 4 inventory, lower hires and center eds, and some impact from GLP-1 trialing. Is that kind of the right way to think about why the U.S. growth in Q2 was about 10%?

Speaker 3

Yes, we communicated that on the Q1 call, what we expected out of Q2, and that's what we delivered.

Okay. The GLP-1 therapies, what makes you think the impact is temporary and short-lived? Why couldn't it get worse from here? Do you have any visibility on dice test growth, like the top of the funnel? Thanks.

Thank you, Larry. We do monitor the DICE growth and when they get scheduled. We do track from the top of the funnel all the way through. When we have communicated with some of our sites, that's where we get the anecdotal feedback that some patients may be trialing it. We do think with the focused effort on the high BMI patients with DICE and the cognitive effort to get those patients to help them lose weight with BMI, that we're being proactive around that to offset any challenge we may have with GLP-1s. Of course, we'll, to your point, monitor that very closely to see how patients are doing with the GLP-1s. The data to date really shows that it has the best impact with the high BMI patients. Lower BMI patients don't really have the lateral wall collapse.

They're the tongue-based collapse that is treated with Inspire therapy, and those are the patients that we are targeting.

Speaker 6

All right. Thanks, Tim.

Speaker 3

Thanks, Larry.

Speaker 6

Thank you. I show our next question comes from the line of Jon Block from Stifel. Please go ahead.

Thanks, guys. Good afternoon. Maybe just to break it apart, are you going to sell Inspire 4 in 2026 in the U.S.? When we think about the revised guidance, is the 4 inventory, you know, arguably cleaned up or depleted, if you would, Tim, in your opinion, by the end of 2025? I'll just try to ask a follow-up.

Speaker 3

Yeah, we're going to continue to have Inspire 4 available both in Europe and in Asia and in the U.S. for select sites that would like to remain using Inspire 4. It is going to be available. The real challenge is managing the inventory in Europe because remember how long it takes to be able to get the EU MDR approval. That's really the number one reserve we have with that inventory. We'll monitor in 2026 how much inventory we even have to be able to use in the U.S., and we'll have better answers and more clarity around that as we work through the year.

Okay. Thanks for that. Rick, I'll take a third shot at the EPS. The way I look at it is the GAAP EPS is essentially flat year to date, essentially. You've got a $0.40 to $0.50 guide in GAAP EPS for the year. You have interest income. I'm backing into, I call it, low single-digit EBIT margins in the back part of 2025. The gross margins are unchanged, the guide. Is it just OpEx as a percent of sales that moves much higher in 2H25? I guess that's part one. Is that correct? Is that also what's going to drive, Tim, in your view, the 2026 revenue acceleration because there's a good amount going into SG&A, DTC, etc., as we exit the back part of this year? Hope that made sense. Thanks, guys.

Speaker 0

Yeah, John, that driver is really increased operating expenses. With our previous guidance, operating expenses increased about 16% over 2024. Now, with our revised earnings per share, if you work backwards, that overall OpEx growth, inclusive of a couple of adjusted items, is 18%.

Speaker 3

I think the increase in our marketing and increase of the footprint is exactly what you described to be able to continue to excite patient flow and move forward into 2026. Yes, John, we fully remain committed to profitability.

Speaker 6

Thank you.

Speaker 3

Thanks, John.

Speaker 6

Our next question comes from the line of Brett Fishbin from KeyBanc Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the questions and first getting me in here. I'll have to follow up to this EPS topic. You mentioned that part of the revision has to do with investments in both marketing and footprint expansion. I was just curious if you could provide a little bit more specific color on what spending in those buckets is incremental versus the prior range. It's like what's being added to the budget versus what was previously assumed, coming out of 1Q. Thank you.

Speaker 0

Yeah, Brett, the real driver there is that we want to continue to build patient awareness. It's going to be our DTC spend that we're going to have increased awareness to really take advantage of the launch and kind of amplify our messaging, as we said in our prepared remarks. We did intentionally hold off on DTC in the first half of the year to focus on the launch. Now we're ramping up those efforts here in the second half of the year. We are still going to do some other spending on other marketing areas as well, and we're going to continue to add territories as we've done in the past. Those are the continued investments that we want to make. We, like as Tim said, remain committed to improving long-term profitability.

Thank you.Thanks,

Speaker 7

Brett.

Thank you. I show our last question comes from the line of Michael Polark from Wolfe Research. Please go ahead.

Speaker 3

Hey, good afternoon.

Hello.

For Rick, for the full year, the updated full-year guidance, $905 million at the midpoint, what is the net inventory destocking headwind in that number? Four comes down, centers that start on five, ramp those units back up a little bit, but it sounds like there's a net negative impact in this updated guidance, and I'm wondering what that number is for the full year?

Speaker 6

Yeah, we have not factored that into our guidance at all. We have increased our inventory balances because we want to have Inspire 5 fully available. Let me start at destocking.

Destocking.

Right.

Destocking is factored into our updated back-half guidance. We did not quantify it, and it would be very difficult to do so. Keep in mind, there's also a timing element here. Depending on when that center transitions to Inspire 5 and destocks their Inspire 4s, there could be some timing element. That is factored into the outlook we gave for the back half of the year.

Speaker 3

Yeah, that's what I was driving to. I can understand for 2H why there would be a headwind on the timing, but at some point, it'll work its way back to neutral. If there's a number you wanted to call out for the full year, I'd be happy to receive it. Where I'm going is I'm trying to visualize the path back to higher than 12% to 13% growth in 2026. One of the things that might not recur next year that is impairing growth this year is this item. If there was a quantification of it, it'd be helpful to envision the reacceleration.

Understood. We're not prepared to give that number at this time, but we'll take that under consideration as we provide guidance for next year.

Okay. I appreciate that. If I can sneak one more in, I know this is a number you're not giving, but again, I think it could be helpful for kind of the new vision from here after the reset. Would you be willing to share at June 30 how many centers were active, implanting in the U.S.? I know the last number we got was 1,435 at 12/31. It would just be great to understand how much center activation was really suppressed in the first part of the year due to all the launch activities.

It is slightly higher. Let's just say it's a little over 1,500 right now. We did still continue to open new centers in the early part of this year, but not at the same rate that we did in 2023. Again, with the Inspire 5 transition underway, we did not want new center openings to distract the field. We did continue to add centers, just not at the same rate. Mike, congratulations on your first form.

Thank you. Thank you. Thanks.

Speaker 7

Very good. Thanks, Mike. As always, I'm grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve successful and consistent patient outcomes. The team's commitment to patients remains unmatched and is the most important element to our success. I wish to thank all of our employees, as well as the healthcare teams, for their continued efforts as we remain focused on further expanding our business in the U.S., in Europe, and in Asia. For all of you on the call, we appreciate your continued interest in and support of Inspire and look forward to providing you with further updates in the months ahead.

Thank you. This concludes today's conference call. You may now disconnect.