Inspire Medical Systems — Third Quarter 2026 Earnings Summary

Financial Performance:

• Third quarter revenue was $206.7 million, a 7.9% decrease from $224.5 million in the third quarter of 2025, driven primarily by a decline in U.S. revenue due to coding and reimbursement challenges.
• Gross margin increased 20 basis points to 86.0% from the prior year period, attributed to an increased sales mix of the higher-margin Inspire V system compared to the Inspire IV system.
• Operating expenses increased $23.5 million (12.8%) to $206.6 million, primarily due to $24.1 million in restructuring charges, $7.0 million in legal settlement expenses, and higher legal fees, partially offset by lower marketing expenses and stock-based compensation.
• The company reported an operating loss of $28.7 million with an operating margin of (13.9)%, compared to operating income of $9.6 million in the prior year period.
• Adjusted operating income was $1.9 million with an adjusted operating margin of 0.9%.
• Net loss was $24.4 million, while adjusted net earnings were $4.1 million.
• Diluted EPS was $(0.84), compared to $0.34 in the prior year; adjusted diluted EPS was $0.14.
• The effective tax rate was 2.5% compared to 26.7% in the prior year, driven by the pre-tax loss and discrete tax charges related to restructuring.
• Net cash provided by operating activities was $46.4 million for the quarter, down from $68.5 million in the prior year period, due to lower net earnings and lower collections on receivables.
• Cash, cash equivalents, and investments increased $48.5 million to $453.1 million as of September 30, 2026, compared to December 31, 2025.

Guidance and Future Outlook:

• The company narrowed its full-year 2026 revenue outlook to $850 million–$860 million, previously $835 million–$875 million.
• Full-year 2026 adjusted operating margin guidance is set at 4.5%–5.5%.
• Full-year 2026 diluted EPS guidance is $(0.36) to $(0.10).
• Full-year 2026 adjusted diluted EPS guidance is $1.20 to $1.40.
• The outlook assumes an effective tax rate of approximately 120% to 175% and an adjusted effective tax rate of 33% to 34%.
• The outlook assumes an estimated weighted average diluted shares outstanding of approximately 28.9 million and capital expenditures between $35 million and $40 million.
• Management expects to return to growth in 2027 following the implementation of new coding and reimbursement clarity.

Business Segments and Product Lines:

• The Inspire V system is driving gross margin expansion due to its higher margin profile compared to the Inspire IV system.
• The AMA CPT Editorial Panel approved new Category I CPT codes for single lead hypoglossal nerve stimulation, including the Inspire V system, effective January 1, 2028.
• The company is executing "Project Horizon," a strategic growth plan involving restructuring charges and redirecting investment capacity into high-impact revenue growth initiatives.

Market and Competitive Landscape:

• U.S. performance in the third quarter came in ahead of expectations despite lingering headwinds.
• Management noted greater comfort among implanting physicians regarding the current coding dynamic.
• The new CPT code approval is expected to provide enhanced clarity around coding and reimbursement, further enabling patient access to Inspire therapy.

Risks and Challenges:

• Revenue decline was driven by adverse impacts of coding and reimbursement challenges.
• Significant one-time costs included $24.1 million in restructuring charges and $7.0 million in legal settlement expenses.
• The company faces risks related to dependency on the Inspire system, fluctuations in financial results, and the ability to sustain profitability.
• Forward-looking statements highlight risks regarding the timing of impacts from coding changes, final 2027 Medicare reimbursement payments, and the success of the strategic growth plan.

Management Commentary and Tone:

• Tim Herbert, Chairman and CEO, stated the company delivered sequential growth in the third quarter with U.S. performance exceeding expectations.
• Management expressed confidence that the new CPT code approval and Project Horizon investments position the company well for future growth.
• The tone indicated a focus on disciplined education initiatives and executing strategic priorities to finish 2026 and plan for 2027 growth.

Other Key Points:

• The company incurred $24.1 million in restructuring charges related to Project Horizon.
• A $7.0 million legal settlement expense was recorded regarding a proposed settlement of a pixel-tracking class action.
• Legal fees increased due to a civil investigative demand from the Department of Justice and patent infringement suits involving Nyxoah S.A.
• Stock-based compensation expense was reduced due to share forfeitures related to Project Horizon actions.
• The effective tax rate for the quarter was significantly impacted by a discrete tax expense of $1,636,000 related to the tax impact of stock-based compensation.
• The company released a full valuation allowance against federal and state deferred tax assets at December 31, 2025, after maintaining it for the three months ended September 30, 2025.