Q3 2019 Earnings Call

Greetings and welcome to the Nuvasive Inc. third quarter 2019 conference call. At this time all participants are no listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero and your telephone keypad.

There might or this conference is being recorded I would now like turn the conference over to your host Suzanne Hatcher, Vice President internal and external affairs. Thank you you may begin.

Thank you Michelle welcome to the basis third quarter 2019 earnings call the company earnings.

Me, which we issued earlier. This afternoon is posted on our website and has been filed on form 8-K with it Securities and Exchange Commission. We have also posted supplemental financial information on the IR website to accompany our discussion.

Before I begin I'd like to remind you the discussions during today's call will include forward looking statements, which are based on current expectation and involve risks uncertainties assumptions and other factors, which if they do not materialize or proved to be correct could cause nuvasive results to differ materially from those expressed or implied by such forward looking statement.

Additional risks and uncertainties that may affect future results are described in new leases news releases and periodic filings with the Securities and Exchange Commission you basically assumes no obligation to update any forward looking statements Reformation, which speak as of their respective day.

This call will also include or discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or yeah, we generate refer to eat that non-GAAP financial measures. These measures include our cost at the sole gross margin sales marketing and administrative expenses research and development expenses operating margin.

non-GAAP earnings per share free cash flow and EBITDA reconciliation for the.

Most directly comparable GAAP financial measure maybe found in today's news release, and a supplementary financial information, which are accessible from the Investor Relations section of the basis website. Joining me on today's call our Christenberry, Chief Executive Officer, Ross as their quota Chief financial Officer and that link President.

With that I'd like to turn the call over to correct.

Thank you Suzanne.

Earlier. This afternoon were reported third quarter 2019, Roberta results of 290.8 million, representing 7.2% reported growth or 7.5% constant currency growth over prior year.

These results are primarily driven by strong performance from U.S. spinal hardware with nearly double digit organic growth year over year attributed to focused commercial execution and continued traction on new products as well a solid growth in the international and services businesses.

Overall I'm very pleased with how the business has performed over the last three course balancing topline revenue growth with increased profitability.

Based on results year to date and continued confidence in the business. We are raising full year 2019 financial guidance Raj will share additional details on the updates to fourth quarter and full year 2019 expectations in a few minutes.

Now, let me discuss third quarter revenue results.

You are spinal hardware revenue increased approximately 9.5% over prior year with meaningful case volume growth of 10.6%.

We attribute this strong performance to several different factors first the U.S. spine market continues to be stable and by our internal estimates grew approximately 2% in the quarter compared to approximately flat to 1% growth over the last 12 to 18 months.

In addition, both the ex less than they live franchises performed exceptionally well driven by increased adoption of Nuvasives X 360 lateral single position procedure.

We're also starting to see further pull through of our posterior fixation technologies by capturing the full X 360 procedure, particularly around Ala.

Surgeon training in adoption.

On the X 360 procedure and lateral as a whole remains on high demand with clinical professional development team training, 20% more surgeons year to date than we did in 2018.

Our proprietary advanced material science portfolio also contributed to growth in the quarter with continued momentum for new product introductions.

Most notably modulus ex lift CLS, a and Tila FFO and cohere Exelis.

We believe balancing innovation or in core technology as well as enabling technology procedures is key to sustaining continue above market growth and U.S. hardware.

You are circuit will support revenue was down approximately 1% over prior year.

Momentum and the Nuvasive clinical services businesses, primarily driven by solid billings and collections and an uptick in overall procedure volumes continue to in the quarter.

This was offset by decline in Iowa and products and biologics.

Biologics revenue reflected about a 1% decline over prior year, we continue to remain confident that the business line will return to growth in the fourth quarter 2019.

Capital equipment revenue for the quarter was nominal as anticipated while we continue to sell lessray incomplete pulse abated valuations for the remainder of the year.

Revenue from the international businesses grew approximately 12% as reported with 13.4% growth on a constant currency basis over prior year.

We saw similar market specific dynamics associated with set availability from the second quarter carry over into the third quarter within the international business.

Turning to profitability non-GAAP operating margin came in at 15.7% for the third quarter, 2019, 10 basis points higher than prior year.

We continue to bounce profitability, we're strategically investing in tiers for future growth, while consistently improving operations.

We continue to make strides towards acting with the rigor and discipline required to successfully execute against our goals.

As discussed during Investor day in August new bases approach to innovation is focused on three key goals driving increased adoption of lesson basis spine surgery.

Developing enabling technology to accelerate this adoption.

And investing further in favorable open markets open segments like cervical and deformity.

Nuvasive is an innovation leader and we'll continue to bring technologies to the market that meets the needs of our surgeon partners and supports better clinical and economic outcomes that enabled more predictable and reproducible spine surgery.

Paul is that the center of Nuvasive, enabling technology platform and is designed to help surgeons adopt a more efficient less disruptive surgical approach.

Across spine procedures.

We're working through post bit evaluations together feedback from surgeons and hospitals on the gained efficiencies from the platforms use in the operating room.

This feedback allows us to further build out the body of clinical evidence supporting the thesis that pulse can drive greater adoption of in mass procedures and enable better in saper surgery.

The information gathered throughout the evaluation period to date has been incredibly valuable when has led to further advancements and increased functionality, a pulse and follow on applications, including robotics.

Since commercial availed availability began in July we started to contract for Paulson collected signposts, we're holding off delivery and installation until the beta phase is complete.

Theres, a capital pipeline of interest, but theyre likely won't be revenue impact on the piano until 2020 further guidance on capital equipment revenue will be shared at the end Q4, along with full year 2020 guidance.

With the focus on wrapping up betas in the us deploying the platform international or internationally is also in the works and important milestone was it early in October with the pulse receiving CE Mark approval.

This allows the initial deployment of the platform across the EU and other CE mark geographies, beginning with several prestigious hospitals and academic institutions in Italy, Germany, and the Netherlands ready to start their valuations.

Now turning to a few other technology roadmap pilots for the remainder of the year and into 2020.

One of most exciting new developments in Nuvasive implant technology portfolio is the alpha release of a new anterior cervical plate.

The system will offer unique multiple unique new features designed to treat judge generation trauma and deformity cases.

You will have significantly improved features compared to alternative devices on the market, making it a highly competitive offerings.

The system will start limited clinical use later in Q4 will preview the technology at the upcoming cervical spine Research Society annual meeting in November .

This directly ties into bases innovation strategy of investing in favorable open markets. We are where we are currently underrepresented and have an opportunity to position or more competitive technology portfolio.

The nuvasive specialized orthopedics businesses.

Line continues to be a competitive advantage globally with innovative technologies that not only take share, but also ship the standard of care and limb lengthening and reconstruction to internal fixation solutions.

Earlier this year, we expanded the precise technology portfolio with the launch of the stride system.

An internal nail which uses magnetic technology to noninvasively linking of patients Lim with an external remote controller.

Stride offers a meaningfully improved compared to previous systems related to post operative weight bearing capability.

Since this launch the product adoption rates have been better than expected with accelerated market expansion.

Looking ahead in this though has several commercial product launches planned for 2020 focused on transforming current standards orthopedic care.

Finally, I'd like to give context to the new organizational structure announced in the press release issued earlier today and form 8-K filed with the SEC.

As CEO of Nuvasive for nearly a year now I spent a lot of time listening learning and assessing the different business functions and overall organizational structure.

Coupled with the company's long term strategic plan the management team and I shared recently at our Investor Day, and natural next step is to implement an organizational structure that is aligned with the strategic plan.

The updated organizational structure includes the implementation of a portfolio and commercial strategy function, bringing together, the salesforce and product and technology teams under one leader our current president Matt links.

Have you know, Matt well from a 13 year tenure with the company. This includes five years of leading US commercial team. In addition to overseeing many key functions and delivering tremendous results and tangible improvements to business operations.

This new structure and able to more holistic portfolio approach towards the management of the global commercial function.

In addition, a new global operations function is being established to optimize our supply chain and manufacturing to better enable the portfolio and commercial planning capabilities.

This further enhances the ability to globalize the business, while continuing to keep the organization organization focused on operational excellence and continuous improvement.

Key operational functions will be managed under one leader and I'm pleased to announce Dale will current head Nuvasives manufacturing will be promoted the head of global operations.

Bill joined Nuvasive in 2018, and under his leadership Theres been significant improvement in the company's insourcing manufacturing efforts and he has evolved the west Carrollton facility by optimizing outputs and streamlining processes.

Prior to joining Nuvasive del spent more than 15 years at general electric with leadership roles and manufacturing operations in supply chain.

I've been impressed with his leadership from the start and I'm confident Dale along with his teams will continue to execute on many of the profitability and operational strategy goals that we have set forth.

Over the next several years.

This new organizational structure will be effective as of January one 2020.

Okay.

Now turning back to the quarter I'd like to close out my formal comments by saying how pleased I am with the strong performance of the organization today.

We are doing what we said we would do at beginning of the year. There are many growth levers I believe are sustainable for the next several quarters in the US hardware business. This should help drive further competence and our ability to grow at multiples market.

And execute on the financial commitments, we communicated to.

I'd like to reiterate the three priorities outlined back in January that a new we needed to accomplish to be an attractive investment in short and long term.

Number one create disruptive technology and continue to be the leader in spine innovation.

Were to focus on operational excellence and deliver world class execution across all aspects of the business and number three drive profitable growth drove renewed rigor and discipline on operating leverage.

With the over performance this quarter and raising full year 2019 guidance expectations I think we're heading into right direction.

We're just getting started with many opportunities to create a further shareholder value by outpacing others with differentiated technology that enables more predictable and reproducible spine surgery focused on improving patients lives.

With that I'd like turn over to rise to further discuss our Q3 financial performance.

Thanks, Chris and good afternoon, everyone.

Before we get started with the financials, let me remind you that many of the financial measures covered in today's call on a non-GAAP basis, and Thats noted otherwise.

These are part of todays earnings news release, as well to supplemental financial information and Nuvasive dotcom for further information regarding non-GAAP reconciliations.

For the third quarter 2019, we reported revenue of 290.8 million, reflecting 7.2% reported growth year over year, and 7.5% growth on a constant currency basis.

Use spinal hardware revenue was $160 million for the quarter this strong growth of 9.5% or prior year.

Performance as into first half the year continues to be driven by solid commercial execution from a stable salesforce new product in procedure introductions and robust case volume growth of more than 10%.

In particular acceleration in the X 360 procedure adoption nuvasive lateral single position surgery, driven by 20% year over year increase in surgeon education instances reaffirms our continued focus on my at surgery procedure realization.

Topline growth was offset by pricing pressure of negative 2.1%.

Revenue from US surgical support was 71.9 million for the quarter down 1% compared to prior year.

Nuvasive clinical services or NCS grew 4.8% year over year as a result of increase case volumes and solid billing and collections.

Partially offsetting the growth from NCS was a decline in Iowa products, driven primarily by competitive pricing discussed in the second quarter.

Turning to biologics within the surgical support business line revenue for the third quarter was down approximately 1% or prior year.

While biologics volumes continued to grow pricing and product mix is impacting revenues along with timing of bulk orders within the year.

Pricing pressure on the Osteocell product lines remains a headwind. However, we are gaining momentum the dbms anat tracks, our synthetic line of biologics aligning with other new competitive form factors further mitigating the impact of fast yourself.

In light of these dynamics the team is executing well with growth still expected in the fourth quarter.

International revenue was 59 million growing 12% as reported year over year and 13.4% on a constant currency basis.

This performance was a bit softer than anticipated primarily driven by limited set availability in Asia Pac and Latin America that carried over from the last quarter.

This was offset by the EMEA region, continuing to performed well with solid year over year growth in the UK, Spain and dock lesions.

We anticipate similar dynamics for the remainder of the year, which I will discuss further in our updated full year 2019 guidance.

Moving to profitability non-GAAP gross margin for the third quarter was 73.5% an increase of 70 basis points compared to 72.8% in the third quarter of 2018.

The improvement over prior year was driven by savings realized from manufacturing efficiencies, partially offset by price and inventory related charges.

Production coming off the Ohio plant is on track for the year and continues to drive benefit to the piano.

non-GAAP Esa many expenses for the quarter, one 150.2 million compared to 139.9 million in the prior year period, representing a 7% increase and remaining flat at 51.6% of revenue.

We continue to realize efficiencies gained from organizational streamlining implemented at the beginning of the year to self fund strategic investments.

In the quarter operational and supply chain investments were made us plan for MDR style packaging and other projects.

non-GAAP research and development or R&D expenses grew 18% to $18 million in the quarter was 6.2% off revenue an increase of 60 basis points compared to the prior period.

R&D spend remains in line with expectations for the focus and investing in enabling technologies to Paul's Npulse robotics, along with plan core hardware business innovation projects.

non-GAAP operating profit margin was 15.7% up 10 basis points compared to the prior year.

The year or yield improvement was driven by the previously mentioned expansion within the gross margin line and partially offset by R&D investments.

This is also above previous expectations, and primarily driven by higher than expected us hardware revenue.

Moving further down the PML interest and other expense net on a non-GAAP basis was 5.5 million in the quarter down from 5.6 million in Q3 of 2018.

non-GAAP tax expense in the quarter was 9.2 million, resulting in a non-GAAP effective tax rate of 23% an increase of 340 basis points over prior year.

This was primarily due to a reserve release that occurred in the prior year that did not reoccur.

non-GAAP net income was 30.9 million or non-GAAP diluted earnings per share of 59 cents compared to non-GAAP net income of 29.5 million or non-GAAP diluted earnings per share of 56 cents in the same period last year, an increase of three cents or 5.4%.

Turning to GAAP results GAAP net income for the third quarter of 2019 was 11 million or diluted earnings per share of 21 cents compared to 15.9 million or diluted earnings per share of 30 cents in the same period last year.

Adjusted EBITDA margin, which excludes the impact of noncash stock based compensation and other non-GAAP adjustments was 25.3% for the quarter compared to 26.7% in the same period last year.

This decrease was primarily due to the investments made in supply chain, including MDR and style packaging.

Finally free cash flow for the quarter was 38.1 million compared to 48.3 million in the same period last year.

This decrease was driven by a reduction in GAAP net income as well as an increase in capital expenditures to support the growth of the business.

Moving now onto guidance based on the results for the first three quarters and the outlook for the remainder of the year, we are raising full year guidance for 2019.

The outlook for full year revenue guidance is now projected at the high end of previous expectations at approximately 1.16 billion inclusive of currency headwind expectations of approximately 6 million.

This reflects an adjusted full year reported revenue growth range growth range of 5.1% to 5.8% compared to prior guidance of 3.4% to 5.4% or 5.6% to 6.3% on a constant currency basis compared to prior guidance of 3.8.

To 5.8%.

We are raising the full year non-GAAP operating margin guidance range to 15.5% to 15.9% compared to a prior range of 15.3% to 15.7%.

The non-GAAP earnings per share guidance range is now expected at $2.35 to $2.40 compared to previous guidance of $2.25 to $2.35.

Overall this updated guidance is primarily driven by the year to date performance.

Fourth quarter expectations are not changing much just a road to get there looks a little different than expected as trend in the U.S. hardware business is offsetting the slightly lower than expected performance in the international business. However, let me give you some additional context around increased guidance.

The U.S. spinal hardware business is not expected to grow between 6% to 7% for the year compared to prior guidance of 3% to 5%.

This increase is driven by exceeding performance targets year to date, but the current quarter once again above market growth rate.

You asked surgical support full year guidance is now expected to be in the range of zero to 2% growth compared to prior guidance of 1% to 3%.

This adjustment is driven by performance and biologics in Iowa and product lines, along with current expectations that pops revenue of not be recognized in Q4.

In regards to the international business expect similar dynamics to continue into Q4 as we saw in Q3, particularly in Asia Pacific and Latin America.

With that backdrop, the full year international revenue guidance is now lowered two range of 10% to 12% growth on a constant currency basis compared to prior guidance of 12% to 14%.

Although lower than previous expectations for this year, we are being diligent on international expansion efforts and balancing capital resources the cost across the globe.

This is impacting short term growth rates, but we remain committed to the long term growth expectations for the international business as discussed at our Investor Day.

The impact of these revenue adjustments result in the non-GAAP operating margin in EPS guidance raises I previously mentioned as you saw in the third quarter, we increase SMTC spend sequentially as investments ramped which was included in in previous guidance and remain unchanged as we expect this too.

And to continue into Q4, along with normal non-GAAP gross margin seasonality.

With three solid quarters behind us we remain optimistic in delivering on our financial commitments for 2019 and with that I'd like to open up the call for acuity.

Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question Q. You May proceed start to if you'd like to move your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star Keith.

Please also note that we ask for participants limit their remarks to one question during today's Q and.

One moment, please only pull for your questions.

Our first question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

Hi.

Okay.

Okay.

Okay.

Our next question comes from the line of Josh Jennings with Cowen. Please proceed with your question.

Hi, good evening congratulations on the strong results, let's hope must start on us spinal hardware, 9.5% growth you guys called out 10% growth in case volumes nice uptick in training on X 360, but my question is really.

With that with this strong growth that you've experienced can you give us some idea of how much the contribution came from new surgeon customers that have been added.

Okay, perhaps partially through this this increased training on the X 360, and then also your Salesforce numbers I mean have you we've been adding feet on the street over the course this year in Tibet other those to contribute heavily.

To the two is still results.

Yes.

Yes. This is Matt.

Appreciate the question.

Excuse me overall the growth was balanced.

With respect to a contribution.

New customer conversion heavily related to anti that's been introduced through the course of 29 team as you think about expansion of existing customers as you know X 360.

Has been a primary focus.

For us through the course of 2019 with the intent that.

The extended portfolio for lateral model single position surgery, and X 360 allows us to increase the addressable market with excellent lateral surgery, so thats been a healthy contributor.

To our existing customer base.

As I said, we've seen a balanced growth through new customer attraction related to empty I across a range of the procedure offerings, including poster interbody with T. liffe, largely I think attributed to advancements in the amec portfolio with modulus and the cohere porous peak.

As well as continued growth in our in our fixation portfolio, so with respect to.

Salesforce additions, we have continued to see net ads across the US commercial organization in line with our expectations for growth this year and continue to see those providing a.

Contribution as expected so it's really really been a balanced.

Approach to growth across both the portfolio and continue to growth of the U.S. commercial organization.

Great and you guys have room for follow up is that just limit to one.

Go ahead, Josh upgrade thanks, Chris I was just was just curious.

You guys and the some nice commentary the updates on the pull system are you guys had a big surgeon event at NASS bunch of surgeons getting your first look at the robotic module that will be added down. The line just wonder if you could give us any color on the feedback.

We see specifically on on robotics and feel free to add any.

Hello, you're getting from a beta launch on on the navigation capabilities as well thanks for taking the questions.

Thanks, Josh you better we've we're obviously Gregory said, we will continue into two to perform beta for the pulse system generally I think that the feedback has been overwhelmingly positive clearly we are we're making sure absolutely sure that the system is fully is fully functional and ready for primetime we.

Gotten tremendous interest from across our customer base.

In anticipation of of the full launch, which we expect over the course of 2020.

In response to robotics I think the the overwhelming response that we that we heard at NASS was was very positive I think we've taken a unique approach to bring a technology to the market very quickly and I think the uniqueness of what we've built within the integrated platform around Poles.

It is really starting to two to come to life in the eyes of our customers. So I think the feedback has been positive momentum you've heard anything specifically, but.

I'll turn over to yes, I think just to further Chris is commentary the intent all along with policy has been to provide a platform with a wide range of applications to drive broad clinical utility certainly with the debut of costs last year in 2018 at NASS building through the early Alpha and beta this year, we continue to see.

A positive reinforcement of that and with the debut.

Josh you mentioned of pulse robotics at NASS I think it really completed the picture of what the platform will we'll be able to offer that the extensibility of the software architecture, such that it flows into the robotics and sort of automation applications and really will support the that broad clinic.

The utility we're looking for across all spine cases in spine pathology. So.

Very pleased with the working contribution of our teams internally as they bring what is a very comprehensive platform to marketplace as Chris said, continuing to validate and harden the platform to ensure that we can deliver against our commitment to our customers heading into 2020 has had led to some some great experiences.

We've got to healthy pipeline as result of it so.

Things are things are on track.

Thank you. Our next question comes from the line of Shagun Singh with Wells Fargo. Please proceed with your question.

Thank you so much for taking the question and congratulations great quarter.

Oh I guess first question is what the selling the impact.

In Q3, and then I wanted to get a better understanding of the implied.

Q4 outlook.

If you're providing care it assumes step down in growth versus your year to date performance.

Assuming you with hardware international weaker and USA.

Stronger so can you give us some.

Thanks for each of the segments in Q4 with this Q3 and then how should be thinking about these buckets in 2020.

Yes, Okay. So hey, this is raj. Thanks for the question. The the first part of your question Chuck on the selling day impact is 1.4% in the quarter. So if you think about the us business of the hardware business that grew at 9.5% could normalize so that the growth rate is more like.

8.1%.

And then as we think about the fourth quarter in terms of the outlook I think the hardware business, let's take one at a time, but the U.S. hardware business will continue to be robust, but again, if you kind of normalized for the one extra selling days you account a little bit for a little bit more price degradation there.

Fourth quarter as is typical.

And just being prudent in terms of Fi year over year, Comparables, we think that the growth from 4.5% to roughly 5.8% to 6% and which is a midpoint up our guidance is is a reasonable so I wouldn't say that I want to continue by saying that we don't see positive growth in the hardware business.

But we have been very prudent in terms of the guidance that we think that it's fair compared to comparables.

As you look at a surgical support business that has not changed materially but.

We did say that they will not be any revenue expectation from faults in the fourth quarter. So that business segment essentially there will be.

Around flat to 1% for the year with biologic showing a little bit of growth.

And.

Biologic showing a little bit of growth in there and the NCS business will continue to kind of track with market like we said.

And then on the international business the dynamics that I pointed out in my written remarks in terms of continuing to see a little bit off a challenge in Asia Pacific and Latin America, as we think about leveraging the goodness have you are seeing the United States constrained thats, a little bit in terms of thoughts that availability on the internet.

So side, so thats going to step down a little bit we'll still see at double digit growth for the are in that geography. So that essentially is the balance for the fourth quarter and the total year.

Any color on 2020, and how these buckets shakeout.

No not at this point, we will report that on our fourth quarter earnings.

Got it and if I could just squeeze in one question for Chris.

It.

Showcase didnt ask this year and.

As in collaboration with Google, which is the gentleman manufactured industrial robot.

Just wondering why was this the right choice and what are some of the key differentiating features between your system and whats competitively available. Thank you.

Well I'll I'll pick up a bit of a shot I think the uniqueness of our system is is truly the integrated.

Application that really is all of Paul so not only having a robotic application, but having the navigation that duty imaging three imaging the inter operative by monitoring system in integrated and.

I think it provides a very unique framework to matts earlier point that provides full utilization across a much broader.

Uh huh.

Spine procedural base. So I I will continue to to think that we've got a very competitive robotic application, but I think the uniqueness of our system is truly the pulse platform and what the integrated.

Software opportunities in the modularity the system actually represents to the broad utilization of this technology.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

Hey, Thanks, sorry for that earlier next year would happen I appreciate your with me back in.

So at a couple of are hallmarks, one Raj on.

With your comment on a pulse on the outlook for Poles and the progression through.

Based on feedback that you're getting.

Yes, you could maybe flesh out what was the process looks like.

It sounds like your phone and want to sort of gaining commitment.

Good for it in the system and then maybe upgrading these sites and this is maybe just walk us through that.

The types of accounts that have committed or.

How they fit into the early parts of the rollout next year, obviously without getting into expectations into specifics, but the process at the very helpful to understand that one follow up.

Yes. This is Matt I'll take that so as we entered into the market with Paul and early Q3.

Expectation was that we would deploy a first set of applications all of which had been.

Validated through Alpha has and continues to gain experience around the integration of those applications inter operatively and so while all applications are validated and improved as we talked about the utility of the pulse platform. It's really been around the integration of applications as you think about deployment of Threed.

Obligation and the integration of both inter operative monitoring of the surgical planning capabilities and so.

We've been able to through a number of pilot sites with our beta to gain a.

A relevant body of clinical experience that allows us to continue to work through.

The software advancement and in doing so to have been able to garner commitments associated with.

Placements of the units moving forward and so that has been the event through the course of the back half of the year, while we provided the guidance we have.

Previously with some conservatism around the relative contribution.

And we believe we remain on track for 2020.

And just because I understand the.

I wonder that process will involve upgrading those sites.

Yes, and then recognize the revenue as you do throughout the.

I want to see early part of your but I want to I don't want you down on that but it seems like those those are the first batch of sites that you're likely to be kind of rolling the final system too is that.

Got it.

If the I think the Directionally, a fair way to look at it but I want to also just.

Sort of address the.

How we would articulate the the final version of the system.

As we've talked about policy, we've talked about a software architecture that's extensible.

Our anticipation is that we will continue down a process over the course of the next several years of adding applications and so when we think about the diversion in the application.

Made available today on Paul's we don't think of that is like a final and then in next gen. There. They have roadmap of applications over the course of the next 24 to 36 months inclusive of post robotics that will be part of it continue will release associated with the system.

As applications will be available to pull sites with installation in future installation. So again I think directionally, you're looking at the right way I just would like to characterize a final version quote unquote has not really the intended endpoint at that it's an extensible system with a roadmap of applications that we intend to deploy over the course of next several years.

Sure well that's helpful amount of data on into what's going on Eightys Jane.

And then and then.

The follow up I had for rise.

I guess I'm just kind of.

Right here, but I hope others.

Just on the emotional and the changes you're making the investments which are making there.

It might be impacting sort of content growth.

The writing business Tonight.

Maybe a little bit more color.

Those are well within our regionally and maybe just timing as to when you think you might start to.

Sure.

Roughly.

Yes, Matt this is Chris I'm, not going to keep you from against numerous enterprise.

Well listen to the yeah.

Some of that some of the growth in the US business honestly has impacted our ability to fully equipped the international markets with some of the sets.

You've heard me talk a lot about getting our supply chain up and running and make in really ensuring that we're operating the company with a with rigor and discipline.

I've said this before our demand truly outstrips, our supply and we've got to make choices over the course of year as to where we're deploying sets and in some cases, we have either forgone delivering sets in the time that we had originally thought because of of of demand that we're seeing in other parts of the world, primarily the U.S. and other markets Western Europe .

And when we've been late with some of those we've seen.

And as a response less than expected growth in certain key markets. That's not all on US there has been certain customers related issues that we continue to to be challenged with and areas like Brazil, but over the course of this quarter. Good news I believe that we're delivering the I think the majority of the sets that we are good.

90 down to Asia, Pac, specifically, Japan, and feel very very good that going into FIS to two 2020 that the the set delivery that was expected earlier, but over the last couple of quarters, what was the filled and we'll be starting out the year with a with very good inventory. So.

That's really the lay of the land on on some of the the shifts that we've seen in the market us versus international growth. This year I think the Rogers point I still believe that we're committed to two delivery of the of the expectations. We laid out in New York back in August for the long term growth is still one of the single biggest opportunity.

International expansion strategy.

Just just really moving to fulfill the opportunities in the short term has been a little bit challenging kind of a good news bad news. Good news is we're seeing very strong growth newest bad news is we need to make more sets. So we're working on that as we speak to try to to try to remedy that situation. Yes, and then if I can just had a little bit here at the outlook for for the.

Sure. It has been has been evolving a little bit like Chris said, we are seeing super robust growth in the United States and then we had some really aggressive expectations in certain geographies on the international side, but they're just doing our best to kind of balance that the opportunities haven't gone away. We were just stuff is this just a little bit off a lance.

Gave shift here so.

Again as far as we said for the international business, we continue to see in the future. Good expansion like we talked about during Investor day. So.

Thank you. Our next question comes from the line of David Lewis with Morgan Stanley . Please proceed with your question.

Good afternoon. Thanks for taking the question Chris just some fall for you and then one for for Ross just on a pulse the purchase order activity I've kind of curious how thats tracked relative to plan.

You did their questions would be in terms of post deal structure do youve any greater clarity kind of post the beta placements, whether we should we think in cash sales or usage based agreements and should we think about the first quarter of 2020 is sort of a full commercial quarter for for the company and then equivalent to rush.

Okay. Thanks, David Thanks for the question.

The the I guess the velocity of the some of the PEO activity has been consistent what we expected I would now again weve.

Because of our internal capacity, we havent necessarily put a full court press on trying to fully commercialized. So we've been pretty selective on customers that we've taken the system too so to that end sands consistent the pipelines actually grown substantially over the last several over the last several months. So that's actually exceeding my expectations on the pipeline development.

I wouldn't say those oppose yet they have to be transition through the process to appeal, but from a general the peos that we have very consistent but I would say that's been intentional we've been considered we've we've approached certain customers and obviously havent overcommitted.

As far as your next part of your question.

As far as the the the the ways in which we will sell or place. These units I think the key and I've said this before is to be as flexible as we can we have fios for purchases were continuing to build out a portfolio of financial arrangements to ensure that we can meet our customers where they are.

Obviously I'm willing to take on volume commitment I am willing to take on some creative ways to get our capital installed.

So we're keeping a very open mind to how we place these and and are keeping a kenai on the procedural sedation aspect of driving both Paul's, but also ensuring that the broader portfolio is is well represented in these procedures that we're covering what the pull system.

As far as your last question on the 2020.

For the first quarter 2020.

I would just say that that will I believe we will be in commercialization, what I, what I consider full commercialization is a bit is a bit Turkey based upon the fact that we have to.

We have an internal capacity that we have to keep an eye on installing these systems getting good selling these systems and servicing the system is going to be a learning curve for us is organization. So to that end, we're we're gating.

Our our commercialization in a very deliberate way.

Really only taking on a certain number of systems that would go out over certain period of time. So as we work through the final stages. The beta will solidify the plans for 2020 more we'll look forward to talking more about that at the end of our fourth quarter.

Hi, Chris very very helpful. And then just Raj maybe cooking few you know we left the the analyst day.

On the margin perspective kind of thinking in the first two years of the L. RP I kind of 50 to 75 basis points is sort of more back half loaded from margin perspective, but then again I'm looking your performance this year and you're obviously tracking towards the top end of sort of 75 basis points on the year and if I look at the fourth quarter frankly, it looks can certainly model from an earnings cycling perspective.

Versus historical trend so.

How should we be thinking about the margin trajectory that you gave at the analyst day should we still be thinking 50 to 75 basis points in the first half of a plan and bigger in the second half of the plan or as progress to date May do you think differently about margins in 2020 and beyond thanks. So much yes, no no no change in the thinking in that trigger.

Our.

<unk> said that we will be very opportunistic in terms of.

Delivering growth and all kind of balancing that the investments that are ahead of us. So obviously this year.

That's been some early goodness in margin primarily from the U.S hardware growth for the year, which we've kind of let it flow through and taken our guidance up.

In the fourth quarter, we expect to be.

Right around the expectation and.

For the you're like I said, we've taken the guidance up appropriately for next year. The investments have you've been talking about in terms of the ERP infrastructure supply chain, finishing out the style packaging and MDR. Those are still some heavy that's still some heavy lifting that needs to be done. So you will see.

Like we've said we will not progress we will deliver margin expansion, it's just going to be on a read them that is more back end loaded than what you'll see over the next year or so but again stay tuned for 2020 guidance would be a little bit more specific around that but the general color hasn't changed.

Thank you. Our next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

Hi, Thanks for taking my questions jumping between calls of something has been asked I apologize I just the first on Paulson I know, we've talked about the U.S. rollout, but what about you launch plans. There I think you said you got approval back in October just curious.

What the what the plans are for the international rollout of that product that I've a follow up.

Yes, as Matt International rollout.

Is much in line with the U.S., we had similarly targeted.

Specific centers across Europe .

For the markets mentioned in the script earlier as well as in Australia, New Zealand.

Similarly, being judicious in the in the roll out there to ensure that we have the infrastructure and capacity to support both site trials evaluation installation and service. So we have a a team in place in Europe that mirrors.

Although scale it appropriately that team that we haven't United State and we're prepared to move forward through the course of late Q4 into the first part of 2020 add I said, you should think about that.

Deployment in a manner relatively similar to the U.S., but scaled appropriately.

Got it and I know, you're probably reluctant to give too much on 2020, but just because you know it it's been a little bit of Oh, I'm moving turnaround. The biologics division that is and just given that you called out some of the headwinds that are maybe taking a little a little longer to turn as we think of too.

Many 20 should we be thinking of the biologics dynamics that you're kind of calling out right. Now is just continuing into 2020 and maybe a recovery there is it a little bit longer or.

It.

For Q is growth and then it just continues to improve from their throughout 2012, how should we be thinking about that I think there would be helpful from a modeling standpoint.

Yes. So at you your commentary is right on we expect continued recovery I think as Raj mentioned in his script, we're seeing continued growth in volumes.

As well as an associated shifted mix from Osteocell to other biologic products within our portfolio, including propel BBM and attract we expect to see growth.

Modest growth in Q4, and I think you could think about that is being relatively stable heading into 2020, but we'll certainly get into greater detail. When we address 2020 guidance.

For the year.

Thank you. Our next question comes from the line of Robbie Marcus with JP Morgan. Please proceed with your question.

Great.

Thanks, a lot and congrats on a good quarter.

Two questions from a first more of a piano question here I saw in the press release that there was.

You lowered adjusted EBITDA by 50, Bips for the year 40, Bips of which was a loss on strategic investment, which just wondering if you could give a little more color on what that was.

Yes, so the explanation on the EBITDA I mean look we're seeing some favorability in stock based comp, which is being offset by other investments in opex. So.

It's did that there is no impact on operating margin, but a slight headwind compared to what your expectations and adjusted EBITDA. That's that's all it is.

Okay.

And then.

This quarter you had really good implant growth I was wondering if you could spend a minute market dynamics and talk about where you might be gaining some share.

Who you think you're gaining it from we saw Stryker stumble this quarter and the spine integration did you get any pickup there and how sustainable do you think the says.

Got it.

Yes, Matt.

So we commented a little bit earlier I think were.

Pleased with the share that we see as a result of a focus on key procedural segment.

Including X lift the next 360.

The adoption in particular.

Lateral ala as a subset of the X 360, insync over this and certainly solution.

Has continued to progress and those.

Gains are directly correlated to the investment we see.

Answered in training and education, and so again very very pleased both with the.

Curriculum development program deployment in commercial execution.

We've been focused on continuing to build out the portfolio and other key procedural segments, including post your fixation Thoracolumbar fixation, specifically and post your inner body poster interbody growth being driven.

Primarily by continued advancements in our amex portfolio.

Both modulus and the cohere porous peak technology. So thats been that's been consistent with expectations and then a continued folks really into the complex.

Deformity segment, both for adult complex deformity surgery, as well as pediatric inclusive of the last market. So there's been there's been steady great gains across the portfolio I'd say an opportunity looking forward as addressing the scrip from Chris is in the cervical portfolio in Q4 will be entering into alpha is for.

The new anterior and post your cervical solutions.

In both incentives. This it solutions will be highlighted at the upcoming cervical spine Research Society meeting will be moving through Alpha Q4 into the first half of 2020 in full commercial launch and I'd say that day a segment for further.

Growth that is important long term for Nuvasive, we highlighted as part of our five year strategy in terms of investing in Underpenetrated segment.

With respect of market share gains I'd say it's.

It's it's opportunity presented itself relatively equally across market segments and from the market in general we see geographic variations in terms of where there's market opportunities and potentially market disruption. So wouldn't suggest that we necessarily see it disproportionately coming from.

Anyone geographic area or competitor again, I've been pleased with the focus of our commercial teams in the U.S. and the consistent execution.

With their planned then we expect that to remain stable heading into 2020.

Thank you. Our next question comes from the line of Matt Taylor with TV. Yes. Please proceed with your question.

Hey, guys. This is actually young Li from Matt. Thanks for taking my question.

Maybe just a follow up on although robotic question.

Can you talk about.

The the robotic arm Bombay land that made any impact on the funnel.

And interest level from customers and.

Foreign Minister traders.

How's the a upgradability.

Sure there or do you system.

The customer.

I mean, it's definitely.

Having gained gaining interest from customers I think it's too early for us to truly comment on how it performs obviously, we're not we're not fully in the market with.

With pulse, yet and we have yet to launch their robotic application, but but I think the we had several hospital administrators and obviously many surgeon partners come.

And view the system at NASS.

A lot of investors and the utilization I think is the critical is the critical value driver in the eyes of hospital administrators trying to trying to maximize their capital dollars trying to maximize minimize.

Capital burden upon a facility. So so they understand the integrated nature of the technology and I think it's a it's a selling point for us and that will that will fully leverage as we move into the market.

The having having a system that data that is that is more representative of the full need in spine I think resonates with our customers and we're hearing that.

Play back to the so it's early days, but feel very very I'm encouraged by the response, we're getting from not only surgeons, but but broader hospital administrators around the opportunity with the system.

Thank you next question comes from the line of Ryan Zimmerman with BTI. Jay. Please proceed with your question.

Thanks for squeezing me in congrats on the quarter just two for me and one first a housekeeping question on second one an extra 60.

Just Raj quick briefly is there any onetime expenses as a result, the org structure change I know that's the second question as well.

The next 360.

It sounds like it's driving a lot of adoption and Matt or Chris maybe you could speak to this but.

Maybe not so much quantitatively, but kind of talk about kind of the incremental revenue dollars per case that you're picking up on some of these cases.

If you were getting 50 cents on every incremental dollar no is it somewhere closer to 90 and again not appreciated I know you're not going to give a quantitative numbers, but just qualitatively can say about that and then where are you add and what's the durability of training appreciating that training metric you gave on surgeons that are trained on extra sexy what's the durbin.

Any of that cadence or how should we think about that cadence going into 2020 ambien. Thanks for taking my question.

Hey, Ryan So from my my from my end the simple answer is no on the one timers and then for the rest of it I don't know pillar to Matt.

I think I think I've got.

Everything here, so with respect to upside I think the without getting into the specific their case values.

One of the benefit.

The next 360 is you're able to address the spine in the latter physician comprehensively so.

Does really a couple of things that are beneficial for us from a.

Case captured perspective.

First the potential ability to capture.

More overall level the surgery, if there was a contra indication for lateral.

It's possible a customer could use a nother solution as an alternative at that level that was contra indicated for a lateral solution.

Or perhaps they do another procedure entirely so thats one benefit the others by virtue of being able to address the spine circumferential IESO anterior post year end lateral all within a single position. There is less likelihood that we see any type of leakage or lots of attachment from a fixation perspective and so.

So those combined provide incremental value to the case and so we are seeing that trend with X 360, and we see that as a and intended benefit Chris referenced earlier really focusing on procedural innovation and providing a comprehensive solution for the surgery and the underlying patient pathology and.

And obviously very focused on integrating the enabling technology associated with poles to that dilution moving forward with respect to durability.

In the overall market.

Lateral inner body represents a relatively small percentage of total inner body and so while we see very.

Very good traction and expanding utility of lateral surgery within our existing excellent customer base and Additionally, we see other competitive.

Lateral users.

Being attracted to the comprehensive solution of X 360, those are positive conversions, when I think towards durability and the role of not just technology, but training and education, increasing the total number of lateral users and therefore, increasing the lateral interbody market relative to more traditional.

During the body is really the pathway, we see for the durability of this type of.

Growth and so as you can imagine we're very focused on creating alignment through our commercial organization for their targeting activities and ensuring that we're aligning technology as well as training and education solution to support that <expletive> to laterals or lateral surgery X 360, and just in general.

Less invasive surgical interventions, which we believe provide significant clinical and economic benefit.

Mr. Barry Weve reached the end of the question answer session I'd like to turn the call back over to you for closing remarks.

Thanks, and thanks, all for joining us today.

As I said I'm very pleased with how the quarters gone.

And look forward to seeing you all again here for me again at the end of Q4, thanks for joining.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.

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