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Small-Cap Confidential
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February 23, 2023

TransMedics (TMDX) and Enovix (ENVX) Report

TransMedics Group (TMDX) reported another terrific quarter after the bell yesterday that should have shares trading higher today. Revenue grew 223.7% to $31.4 million (beating by a whopping $7.8 million) while GAAP EPS of -$0.21 improved from -$0.46 in the year-ago quarter and beat by $0.11. That result caps off a year in which TransMedics grew revenue by 209% to $93.5 million.

Management’s 2023 guidance of $138 - $145 million (up about 52%) is better than consensus of $134.7 million and seems very conservative given the trend of beats in 2022.

Breaking down Q4 Heart sales were $13.1 million, Liver was $16.2 million and Lung was $2.1 million. The National OCS Program (NOP), an end-to-end tech and expert clinical service solution that streamlines transplant logistics, has been instrumental in growing U.S. volumes and handled 79% of Heart and 97% of Liver in the quarter. Lung remains depressed due to COVID, though an initiative to double lung transplant volumes this year should help.

Stepping back, the company is in full-on growth mode, trying to work through supply constraints and willing to give up some profit margin (gross margin of 66% in Q4 vs. 72% in the year-ago quarter) in order to ramp up volumes. My guess is the next two quarters will be slower than the second two in 2023 as management tries to address the supply issues. But given the track record of beat-and-raise here I expect more of the same, barring any major unforeseen issues.

I have been thinking TransMedics could be tempted to tap into the market for an equity raise, which could dent the stock short-term. However, it ended Q4 with $201 million in cash, up from $25.6 million at the end of last year, largely thanks to the equity raise last August. They may not need it now, but given interest rates and an easy-to-achieve one-year yield on cash of 4.5% (roughly) it wouldn’t surprise me to see an offering. Keeping TMDX at hold, but if you can buy shares below 72 go for it. HOLD THREE QUARTERS

Enovix (ENVX) in 2022 was like a new NFL team that had a ton of potential but made so many unforced errors during the season that fans wondered if the coaching staff started the day with beers and pretzels instead of coffee and bagels. With a number of new team members on the field in 2023 and much lower expectations, we’re hoping for a fresh start.

Yesterday’s Q4 update suggests things are on track and supports expectations for better execution throughout the year. Recall that Enovix has shifted resources from its Gen1 production line to a more automated Gen2 line (10X higher speed, lower cost, flexibility, etc. expected). They previously set expectations for 180,000 revenue-generating wearable units from Line 1 in 2023, for a mid-March sign-off on Gen2 equipment/design, a July site decision (Southeast Asia) for the low-cost Fab2 site and 9.5 million units made in 2024. That’s the gameplan.

On yesterday’s Q4 call management reaffirmed this plan. They expect to double production in each quarter in 2023 to get to 180,000 units and are on track for 9,000 in Q1. The next milestone is to hit that mid-March deadline for final design and get equipment landing at the site starting in November.

That’s the manufacturing side of the equation. On the demand side, management continues to see a ton of demand for customers in wearable, industrial, medical, computer and EV markets. As we work through the year we expect to hear more on the financing plan, whether that be a JV (joint venture), licensing agreement or some other form of partnership that helps Enovix cover necessary capital costs to build out manufacturing capacity.

Finally, turning to the quarter the company generated $1.1 million in revenue and plans to spend $240 million in 2023 on operating expenses and capex. Enovix shipped 4,442 cells in Q4, ahead of expectations. Roughly $250 million in “Engaged Opportunities” moved closer to contracts by shifting to “Active Designs and Design Wins” between Q3 2022 and Q4 2022.The company ended the year with $323 million in cash and equivalents and expects to spend $240 million this year on capex and operations. This update should help the stock. HOLD

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.