NeuroPace (NPCE) Q2 2025: Gross Margin Rises to 77.1% as RNS Platform Momentum Accelerates
NeuroPace’s second quarter delivered record revenue and a sharp gross margin lift, reflecting disciplined execution and growing adoption of its RNS system. The business is navigating the Dixie Medical wind-down while doubling down on its core neuromodulation franchise, leveraging clinical data to expand indications and fuel future growth. Raised guidance and expanding AI initiatives set the stage for a pivotal second half and beyond.
Summary
- Margin Expansion Signals Operating Leverage: Gross margin improvement and cost discipline are materially strengthening the path to profitability.
- Clinical and Commercial Flywheel: Strong RNS adoption, robust clinical evidence, and Project CARE are reinforcing durable growth.
- Strategic Focus on Core Platform: Divestiture of Dixie and new data-driven tools position the company for higher-margin, indication-led growth.
Performance Analysis
NeuroPace posted a record quarter with revenue growth of 22% year-over-year, driven by sustained demand for its RNS system, a neurostimulation device for epilepsy that detects and responds to abnormal brain activity in real time. The company’s gross margin reached 77.1%, up from 73.4% in the prior year, reflecting both manufacturing efficiencies and a favorable product mix as RNS volumes increase and lower-margin Dixie Medical sales phase out.
Operating expenses (excluding one-time items) grew at a slower pace than sales, highlighting underlying operating leverage. Free cash flow improved year-over-year, with negative $2.3 million versus negative $4 million, as higher revenue and margin gains offset ongoing R&D and commercial investments. The refinancing of debt on improved terms further reduces interest expense, providing more flexibility as the company transitions away from Dixie Medical and focuses on its higher-growth, higher-margin core business.
- RNS System Drives Core Growth: RNS revenue rose 16% in the quarter, with first-half growth at 21%, powering the company’s top-line trajectory.
- Operating Leverage Materializes: Expense growth of 13% lagged sales, supporting the company’s path toward cash flow breakeven.
- Strategic Debt Refinance: New terms cut annual interest by $2 million, freeing up capital for innovation and commercial scale-up.
Momentum in both clinical and commercial execution is translating into upwardly revised revenue and gross margin guidance for the full year, with management targeting $94–98 million in revenue and 75–76% gross margin, and signaling a path to 80% as Dixie is fully exited.
Executive Commentary
"Our strategy is working. We continue to see meaningful progress across market development, clinical development, and product development, all of which we view as world-class opportunities. These opportunities strengthen our position to deliver outsized impact for patients, physicians, and the business."
Joel Becker, Chief Executive Officer
"Gross margins are certainly going to help us as well as the fact that our revenue continues to grow, which, of course, is compelling. The resurfacing and the refinancing of the debt is saving us about $2 million of cash interest expense annually. And so that's just another tailwind that we have that continues to push us towards our longer-term strategy of getting to cash flow break-even as we move out of 2027."
Patrick Williams, Chief Financial Officer
Strategic Positioning
1. RNS System as Core Growth Engine
The RNS system, a responsive neurostimulation therapy, is the company’s primary revenue and margin driver, with broadening prescriber adoption and ongoing clinical validation. Management emphasized that the existing customer base and indications are fueling consistent 20%+ growth, even before potential label expansions.
2. Indication Expansion and Clinical Data Leadership
NeuroPace is leveraging robust clinical trial data to pursue label expansion, particularly for idiopathic generalized epilepsy (IGE) and pediatric populations. The Nautilus trial, despite narrowly missing its primary effectiveness endpoint, demonstrated highly statistically significant secondary outcomes, supporting a broad FDA submission. Management expects the PMA supplement for IGE in the second half of 2025, and sees the pediatric market as a significant, mission-aligned opportunity.
3. Project CARE and Community Channel Expansion
Project CARE, a program to expand access to RNS therapy through community-based sites, contributed meaningfully to implant volume growth. The company is refining its approach to onboarding new centers and leveraging direct-to-patient marketing to drive funnel expansion, supporting both near-term sales and long-term market penetration.
4. Data and AI-Driven Product Differentiation
With over 22 million recorded events in its proprietary database, NeuroPace is building a data moat that powers next-generation AI tools for seizure detection and clinician workflow. The first AI-powered software features are on track for 2025, supporting both clinical outcomes and operational efficiency, and creating new partnership opportunities with pharmaceutical and research organizations.
5. Operating Model Realignment and Dixie Exit
The wind-down of Dixie Medical product sales, which contributed mid-teens percentage of revenue, will sharpen the company’s focus on its high-margin RNS franchise. Leadership affirmed that the core RNS business can sustain 20%+ growth, with the potential for acceleration as new indications and commercial initiatives mature.
Key Considerations
This quarter marks a strategic inflection as NeuroPace transitions from a diversified revenue mix to a focused, high-margin neuromodulation platform. Investors should monitor execution on several fronts as the company enters a new phase of growth and profitability potential.
Key Considerations:
- Margin Trajectory Post-Dixie: As Dixie revenue phases out, the path to 80%+ gross margin becomes clearer, but will require continued RNS volume growth to absorb fixed costs.
- FDA Engagement and Label Expansion: The outcome of Nautilus trial discussions and the pediatric submission timeline are pivotal for broadening the addressable market.
- Commercial Channel Maturation: The speed and depth of Project CARE’s community site ramp will determine the durability of top-line growth.
- AI Innovation and Data Monetization: Realizing value from proprietary data and AI tools could unlock new revenue streams and reinforce competitive differentiation.
- Leadership Transition and Execution Consistency: Recent CFO and sales leadership appointments bring fresh perspective, but maintaining strategic focus during this transition is critical.
Risks
Key risks include regulatory uncertainty around label expansions, possible delays or additional trial requirements from the FDA, and the challenge of sustaining double-digit RNS growth as Dixie revenue is fully replaced. Reimbursement dynamics, especially with CMS, remain a watchpoint, though the recent IPPS rule outcome was favorable. Competitive threats from alternative neuromodulation approaches and execution risk in AI productization also merit close monitoring.
Forward Outlook
For Q3 2025, NeuroPace guided to:
- Continued RNS-driven revenue growth, with Dixie Medical contribution winding down
- Gross margin stability at or above the raised guidance range
For full-year 2025, management raised guidance:
- Revenue: $94 million to $98 million
- Gross margin: 75% to 76%
Management highlighted:
- Strong momentum in core RNS adoption and prescriber engagement
- Ongoing investment in AI-powered product enhancements and clinical programs
Takeaways
NeuroPace is executing a focused transition to a high-margin, data-driven neuromodulation platform, with clinical validation and operating discipline underpinning the growth narrative.
- Margin Expansion Is Durable: Gross margin gains are sustainable as Dixie exits, especially if RNS volumes accelerate and AI initiatives deliver operational leverage.
- Indication Expansion Is the Next Growth Catalyst: Success with Nautilus and pediatric submissions could materially expand the addressable market and diversify the revenue base.
- Execution on Community Expansion and Data Monetization Will Define the Next Phase: Watch for further traction in Project CARE and tangible AI tool launches as key drivers of future upside.
Conclusion
NeuroPace delivered a quarter of operational and strategic progress, raising guidance while demonstrating clear margin leverage and execution on its platform strategy. The company’s conviction in its RNS franchise, clinical pipeline, and AI roadmap positions it for durable growth, though regulatory and execution risks remain top of mind as the business sheds legacy revenue streams.
Industry Read-Through
NeuroPace’s results highlight the growing importance of data-driven differentiation and indication expansion in medtech. The company’s success in leveraging clinical evidence for both FDA engagement and commercial adoption offers a roadmap for other device makers seeking to move beyond single-indication models. The focus on AI-powered workflow tools and direct-to-patient marketing reflects broader trends in healthcare digitization and consumer engagement, while the margin trajectory and channel expansion illustrate the value of operational discipline as legacy product lines are exited. Investors in neuromodulation and digital health should closely watch how proprietary data assets and payer engagement shape future growth across the sector.