Q4 2019 Earnings Call
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Great. Thank you welcome to the basis fourth quarter and full year 2019 earnings call.
Any earnings release, which we issued earlier this afternoon posted on our website filed on form 8-K with the Securities Exchange Commission. We've also posted supplemental financial information on the IR website to the company our discussion.
Well, we've again I'd like to remind you the discussions during todays 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 could be correct. The coffee basis 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 basis news releases, a periodic filings with the Securities Exchange Commission evasive assumes no obligation to update any forward looking statements or information, which speak as their respective date.
I will also include a discussion of several financial measures that are not calculated in accordance with a generally accepted accounting principles or gas. We generally refer to these non-GAAP financial measure. These measures include our cost of goods. So gross margin sales marketing and administrative expenses research and development expenses operating.
Margin non-GAAP earnings per share free cash flow and EBITDA reconciliation to the most directly comparable GAAP financial measures may be found in today's news release and supplementary financial information, which are accessible from the Investor Relations section of the basis website. Joining me today on the call are very cheap.
Executive officer, not horrible Chief financial Officer, and that link presence now with that I'd like to turn the call Arborcrest.
Thank you Suzanne and good afternoon, everyone.
Earlier today, we reported fourth quarter and for year 2019 revenue results in line with the preliminary results, we announced on January 13.
On today's call I'll provide a high level overview for your 2019 results then turn to our 2020 strategy, including key technology focuses and planned investments.
Not horrible our newly appointed CFO, well then share additional details on the fourth quarter and for your 2019 performance as well as 2020 financial guidance.
In 2019 for your revenue came in at 1.168 billion growing 6% as reported and 6.6% on a constant currency basis I continue to be encouraged by these above market growth rates as a result of more innovative technology best in class clinical training and focused execution against the backdrop.
A couple of stable spine market.
These results were primarily driven by the continued strength in the U.S. spinal hardware business led by the adoption of our X 360 system, our comprehensive approach to lateral single position surgery.
The X 360 system Leverages advanced techniques and technologies to deliver patient specific care, while enhancing operating room work flow inefficiency.
X 360 is inclusive of excellent X Ala and expectation and we view this procedural system as a key driver or future growth.
In addition, our commercial teams focused and executed well on selling across the entire portfolio as we saw our biologics product line returned to growth.
I'm pleased with how we finished up this year on international side growing at the top end of our guidance range, Matt will share additional financial commentary on each business line relative to fourth quarter trends and now that sets us up for 2020.
For full year 2019, we delivered a non-GAAP operating margin of 15.8%, a 70 basis point improvement over last year.
This is a reflection of continuing to balance profitability strategically investing here is a future growth what the same time consistently improving on our operational performance.
Overall, the business for Marlins, when you're not getting.
Coming into the role CEO at the end of 2018 my goal was to balance topline revenue growth with increased profitability why consistently delivering on our results I.
I believe we achieved that this year all whats serving our purpose are transforming surgery advancing care and changing lives.
Now I'd like to turn to 2020 and share with you as a new technology updates that supports our five year strategic plan.
As an innovative spine company focused on bringing disruptive technology to the industry Nuvasive launch 16, new products across our portfolio and 29 thing.
In 2020, we anticipate to once again deliver more than a dozen new technologies that align with the needs of our surgeon partners and support better clinical and economic outcomes to enable more predictable and reproducible spine surgery.
These new innovations are focused on three key goals.
Driving increased adoption of less invasive spine surgery, developing enabling technology to accelerate this adoption and investing further in favorable open spine surgery segments of the market.
First to further penetrate the am I asked segment and enable less invasive spine surgery. We will continue our efforts on surgeon training to support the global adoption of the X 360 system. The most comprehensive lateral system on the market.
The am I asked segment is growing three times faster faster than traditional open spine surgery and offers clinical and economic benefits to both patients and hospitals.
Last year, we saw growth from traditional nuvasive lateral surgeons and experienced good momentum converting new surgeons in the back half of 2019.
We're also starting to see an increased demand for X 360 from surgeons, new dual lateral surgery approach.
The ability to deliver this advanced lauer lateral approach through superior technology and best in class clinical training as a tangible example, how nuvasive is bending the adoption curve for lesson base the spine surgery.
I'm equally excited about the traction.
Xthree 60, you seeing outside the U.S.
We recently held or international sales meeting, where we saw surgeons from UK, Italy, and Germany to name a few discussed.
Their adoption of X 360, and the positive effect it has had on their patients and practices.
We continue to generate data that validates the value propositions associated with our X 360 system.
Last year performing lateral spine surgery using extra 60, we estimate we saved more than 3500 hours in the operating room, equating to roughly $14 million and cost savings for hospitals.
These outcomes along with several patient benefits, including less time under anesthesia.
Or powerful data points that are proliferating the game changing approach spine surgery.
In support of our focus on delivering a comprehensive procedures to enable better outcomes. We also are focused on developing differentiated implants and instrumentation to enable these techniques.
Well build out the advanced material science portfolio spinal interbody is to support many procedural categories.
This includes the full commercialization of cohere Exler in several key force peak and optimize threed printed titanium alpha launches related ayliffe dealer and more.
We continue to receive positive feedback from surgeons on the novel spinal implants, validating important so and focused on surface structure and radio listening seek to enable better clinical outcomes for their patients.
To further our position as a spine implant leader. We currently have several clinical studies underway and are planning to kick off several more.
This year to demonstrate the efficacy and superiority of the poor speak implant for bone in growth.
Another dimension for growth is investing and penetrating targeted open spine surgery segments of the market.
We plan to make solid headway on the development of a new cervical portfolio, which will rival what is currently on the market.
This includes launching an interior cervical plate to treat duration trauma and deformity as well as a new cervical fixation system to improve posterior surgery.
Our commercial team as well as the surgeons, who are currently participate in the alpha launches of these products are very excited about the prospect for this new technology.
Now I'd like to turn to an update on pulse and our broader enabling technology strategy.
As discussed previously we've been working through postpaid evaluations for the last several quarters.
As is the purpose of the beta phase we gathered a lot of important feedback from surgeons hospitals on many different aspects of the system.
From technical performance, the measuring gained efficiencies for the platforms use in the operating room.
Their insights learned during the verification and validation testing process. We've made the decision to continue its continuing to reiterate on the platform development.
We expect this work will continue throughout the year I've been a part of the development of these types of foundational technology systems. Many times my career and it's critical that the release of the system as a smooth as possible and delivers on optimal clinical experience.
I want to reiterate that the pulse platforms capabilities continue to receive excellent feedback from customers. The strategy of offering a modular integrated platform that is applicable in nearly a 100% spine cases resonates with surgeons and hospital administrators.
We need to ensure it exceeds our customers' expectations right out of the gate.
Our strategy remains the same and we will continue to forge ahead with the further development of pulse and pulse robotics in parallel.
Now turning to R&D in 2020.
We will continue to invest in our core spinal hardware products, enabling technology. In addition to these focused efforts will also fund several key investments related to further globalization and operational improvements to sustain our growth momentum.
One key area of investment specific the globalization our initiatives to comply with European medical device regulation. This includes sterile packaging, which enables us to fully.
Participating in key global markets.
This is an undertaking that requires focus attention resources and investment again this year.
In addition, we're making necessary system investments to foster operational efficiencies and drive the company into the next phase of growth.
These planned investments were made in a disciplined way to support to support.
The long term strategic goals.
What I'd like to leave you with today is that I'm energized by what we see ahead in 2020 coming off a strong 2019, we have multiple ways to continue to grow and make an impact on the market.
On the operational front, we've made steady improvements over the past year, allowing us to drive margin improvement.
We're increasing our focus on operational excellence and fully leveraging our insource manufacturing capabilities, along with a focus approach to improving global logistics and film it to make it a true competitive advantage.
With that I'd now like to turn the call over to Matt.
Thank you, 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 are on a non-GAAP basis unless noted otherwise.
Please refer to today's earnings news release, as well as a supplemental financial information on Www Dot Nuvasive dotcom for further information regarding non-GAAP reconciliations.
For the fourth quarter 2019 revenue was 310.4 million up 7.6% year over year on a reported basis and 7.8% on a constant currency basis. This above market growth was driven by us hardware and international.
You have spinal hardware revenue grew 7.9% year over year 268.9 million.
This strong performance is attributed to continued surgeon adoption of our differentiated X 360 system and advanced materials science implants.
Nuvasive strategy around procedural innovation continues to take hold as we see steady implant pull through across various product portfolios.
We also saw a mid single digit percent increase within our cervical portfolio and outcome of strategic execution in targeted opened spine surgery segments, where we have historically been underpenetrated.
Revenue from U.S. surgical support came in at $77.3 million up 2.7% over prior year <unk> surgical support revenue growth was attributed to Nuvasive clinical services billing and collections normalizing, resulting in low single digit growth as expected.
Biologics returned to growth in the fourth quarter up nearly 5% over the prior year period, we're pleased to see biologics turned the corner as we have worked to expand the portfolio to include competitive BBM and synthetic biologic offerings as well as annualizing price and mix headwinds.
Turning to international revenue was 64.1 million for the fourth quarter 2019, growing 13.6% year over year as reported and 14.3% year over year on a constant currency basis.
This performance was led by Europe growing more than 20% year over year on a constant currency basis with contributions across all geographic regions. We look forward to continue elevating nuvasive spine pediatric and specialized orthopedic portfolios in this region.
Asia Pacific performed in line with internal expectations growing high single digits as forward progress was made in the quarter to improve the SEC constraint issue in 2019.
On a constant currency basis, Latin America grew in the mid double digits, primarily driven by solid growth in Brazil, and Mexico as set availability improved throughout the back half of the year.
Overall, we're pleased with how the international business ended the year, finishing at the upper end of our guidance range.
Turning to the rest of the piano non-GAAP gross margin for the fourth quarter was 73.2% or a 310 basis point improvement over prior year of 70.1%.
Gross margin expansion was driven by efficiencies across manufacturing operations as well as timing of inventory reserves related to new product introductions.
Non-GAAP EPS M&A expenses increased by 13% compared to prior year to 50.9% of revenue in the fourth quarter or 158 million.
Approximately 5% of the increase relates to mark to market adjustments from stock based compensation driven by the 56% increase in our stock price in 2019.
The remaining investments were primarily driven by supply chain initiatives European medical device costs and revenue related expenses.
Non-GAAP research and development or R&D expenses totaled approximately 18.3 million or 5.9% of revenue in the fourth quarter 2019.
9% increase over prior year, primarily reflects innovation investments and pulse and pulse robotics.
Fourth quarter 2019, non-GAAP operating margin came in at 16.4% an increase of 40 basis points over prior year.
This was primarily driven by efficiencies from Insourced manufacturing and disciplined spending partially offset by the previously mentioned stock based compensation headwinds.
Turning to tax our non-GAAP tax expense in the quarter was 7.8 million, resulting in a non-GAAP effective tax rate of 16.8% this lower than expected rate for the fourth quarter reflects a couple of discrete onetime favorable tax adjustments in the period.
Fourth quarter non-GAAP net income was 38.5 million or non-GAAP diluted earnings per share of 73 cents compared to non-GAAP net income of 36.1 million or non-GAAP diluted EPS of 69 cents for the same period last year.
Turning to our GAAP results GAAP net earnings for the fourth quarter of 2019 were 29.9 million or GAAP diluted earnings per share at 55 cents compared to 12.2 million or GAAP diluted EPS of 23 cents in the same period last year.
Now a quick review of our full year 2019 numbers before I discuss 2020 guidance.
As Chris previously stated on a full year basis revenue came in at a 1.168 billion growing 6% as reported and 6.6% on a constant currency basis.
Non-GAAP gross margin was 73.3% or 140 basis points above prior year with expansion, primarily driven by manufacturing efficiencies.
Non-GAAP operating margin for the year was 15.8% compared to 15.1% in the prior year operating margin expansion was driven by gross margin improvement and benefits from streamlining of non sales and back office functions, partially offset by strategic Reinvestments in key areas of the business.
Yes.
Non-GAAP other income and expense was 20.2 million in our non-GAAP effective tax rate was 21.3% for the full year.
Full year non-GAAP net income was 129.8 million or diluted earnings per share of $2.47 compared to non-GAAP diluted EPS of to 23 in the prior year, an increase of 10.8%.
Finally free cash flow for the year was 112.4 million compared to 117.3 million in 2018.
The decrease over prior year was driven by our operating performance offset by higher expenditures for inventory in surgical instrument sets.
Yearend cash and cash equivalents was 213 million up 95.2 million from prior year.
With regard to our guidance for 2020, we estimate revenue growth for full year 2020 to be in the range of 4% to 6%.
We expect currency to have an immaterial impact.
Let me provide some context in setting these expectations within the provided range.
Our guidance reflects a few macro and internal factors first we expect the U.S spine market to continue to remain stable in 2020.
Similar to what we experienced in 2019.
Second the outlook for the use spinal hardware business line remains strong driven by similar trends. We saw in 2019 with the adoption of our X 360 system and advanced materials Science implants third we expect international sales growth in the low double digits.
US spinal hardware revenue is expected to grow multiples of the market at 5% to 7% driven by the adoption of new product introductions and accelerated trading on our X 360 system.
We will fully leverage and expand our best in class clinical development program for surgeon training by expanding capacity in several key locations, including the east coast and internationally.
We will also continue our focus on targeting traditional opened spine surgery market segments, where we are underrepresented and where we have an opportunity to gain market share like T T lift cervical and deformity.
The first half of 2020 will be a focus on alpha products in these respective areas with anticipated full commercial launches in the back half of the year.
We look to maintain competitive instrumentation and implants by launching about a dozen new products, all while continuing the development and commercialization of our enabling technology offering.
US surgical support guidance range is a decline of 3% to positive 1% growth.
We believe this is realistic based on tough comparisons from 2019, which included the Tailwinds from historical NCS billing and collections that we don't expect to continue.
This range also assumes continued pricing pressure in our I'll end product line and biologics growing at market rate.
For 2020, the international business is expected to grow low double digits. This is predicated on continued share taking in key markets going deeper and driving new product introductions remains at the core of our strategy for delivering international growth.
Moving on to operating margin, we expect our non-GAAP operating margin for 2020 to be in the range of 15.8% to 16.2%.
This inline with what we communicated at last year's Investor Day, and our strategy of driving to 20% plus operating margin by 2024.
In 2020, we must invest in infrastructure, the European medical device regulation and sterile packaging to deliver growth in future years.
In terms of timing and cadence of margin growth expected to be heavily weighted to the second half of the year due to timing of stock based compensation and Annualization of investments we made throughout fiscal year 2019.
To be clear, we expect some margin contraction in the first half of 2020 and expansion in the back half of the year to achieve our guidance.
The company estimates non-GAAP diluted earnings per share for the full year 2020 in a range of to 55 to 265.
On a GAAP basis, we estimate diluted earnings per share in the range of $1.15 to $1.25.
This range reflects headwinds from several onetime favorable tax items in 2019 that we don't expect to repeat.
You can find further details on our GAAP expectations on Nuvasive dotcom in the Investor Relations section or in today's press release.
One final item on guidance, we expect free cash flow to be greater than 100 million, which will be driven by improved operating cash flow offset by an increase in capital expenditures.
This increase in capital expenditures is primarily due to surgical instruments associated with our sterile packaging roadmap.
Investments in the new surgeon education facility at our San Diego headquarters and manufacturing operations.
With strong free cash flow, our previous disclose capital allocation strategy remains the same.
We will continue to balance our investments in R&D.
Procedural assets and company infrastructure, and we will also consider opportunistic M&A as well as potential share repurchases under our authorized repurchase program.
In conclusion, I believe in Nuvasives ability to thrive and continue to be leading innovator in spine.
In 2020, we will drive disruptive technology, the changes patients' lives and enables positive and predictable outcomes.
We plan to increase R&D spend on enabling technology to make foundational globalization investments to remain competitive in European market and invest in operational efficiency initiatives to drive improved supply chain performance in the years to come.
I'm confident these investments will drive significant returns to the company through revenue growth and margin expansion into the future.
Thank you and with that I'd like to begin with you in a session.
Thank you.
We will now be conducting a question and answer session.
Good question you May press Star one on your telephone keypad confirmation Tom indicate your line is another question Q you May press Star too if you would like to remove your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keys. Please also note that we ask that participants limit their remarks to one question during today's question and answer session.
First question comes from the line of Josh Jennings with Cowen and company. Please proceed with your question.
Hi, good afternoon, and thanks for taking the questions. Congratulations on a strong 2019 and congratulations Matt on his new position.
And Chris just a follow up on your Paul's comments, and maybe any incremental color you can share just on what capabilities or.
Features need need optimization.
And just a follow up on that is just in terms of timing it sounds like we should be expecting us to navigation.
So poles to launch maybe in 2021.
Talked about come in parallel continued development on the robotics module is that still a 2021.
Timeline for robotics, so there's a couple of pulls questions in there but.
Any incremental color answers those question would be great. Thanks for taking the question.
Thanks, Josh.
Yes, basically just to kind of level said, we debate evaluation of extended throughout really the remainder this year as we've previously communicated we do expect.
Minimal revenue contribution Paul this year and you're right on we're expecting it to be in the market in the 2021 timeframe and really the commentary here is just a function of our our verification validation efforts to ensure the system is stable.
Like I said in the end my previous comments the value proposition I think has has been very well received by our customers.
Our ability to ensure that all of the systems the of the different technologies in the system are working.
Together, it's just it's just situation that I've, probably been a little bit more assertive in saying, let's make absolutely share, let's extend the testing as long as we need to let's not let the sense of urgency overwhelm us that pushes away from the strategy of driving the most effective technology in the market and really fulfilling the value proposition we described.
To that end.
The extenuating beta testing with Pauls does work in parallel cost robotics, and we're still actively developing that technology in parallel so.
The current situation of Pauls, we don't believe has been material impact on the launch of a robotic application obviously the pratik. It has to be Paul then on top of that we plan to bring the robotic application to market.
Quickly thereafter.
Early now to talk about 2021 with robotics, but clearly as we move through this year with the with the final stages of development robotic application and with the final launch of Paul.
More insight as we move through.
Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed with your question.
Hi, This is based on for David say, thanks for taking the questions.
Chris as a follow up to yet so first question here.
It sounds like the base case timeline for a more fullscale launch, we should clarify as back half 20, or first half 21, and then as a quick follow up on that or the increased investments youre going after making titrate the system.
Okay, secondly to risks to margin expansion at all this year or will you appropriately balance kind of drop through and reinvestment. Thanks.
Yes, Thanks Mason.
Basically what we will do is will be will be in extend beta beta testing throughout 2020 with with our desire to fully launched a system in 2021.
This doesn't we don't believe puts any put any further risk other than what we've already described we are investing heavily in the organization. This year in part of that investment is continuing to support the overall, enabling technology strategy inclusive of calls and robotics. So this doesn't necessarily indicate any any change in our in our and our overall spend pro.
File it just extend the timeline that we had originally thought on when we could look fully launch the product with confidence, we're making sure that we we launched the most stable safe and effective product into the market and ensuring that we do so we're just extending this testing for for the for really throughout the throughout the year 2020.
Mason the only thing I would add this is Matt Matt Harvest accuse me is.
We do expect very nominal revenue contribution from pulse. This year. So the guidance that we provided today incorporates our thinking around pulse.
Okay.
Got it Thats helpful and as a quick follow up on your <unk> surgical support is the potential decline. This year, mainly a factor of comps I mean, you have biologics growing in line with market. So call. It flat and then some contribution from Paul but what can we see them most opportunity for declines here is kind of what we're trying to get at thanks very much.
Yes, I think represent upside as Matt link referenced in the earlier comments, it's a normalization and billions. We had some benefit onetime benefits is of course of last year as we were.
Updating systems and integrating the acquisitions across our businesses and so we saw some onetime benefit on the billing and collection side that we don't expect to recur and 2020 says you normalize that out along with just competitive pricing pressures, we see across island segment. That's the major driver there and Mr. Douglas.
Yes. The other thing this is Matt Harbor, the other thing I'd like to add to this is.
That that onetime billings and collections that Matt talked about on a full year basis was about 10 million in incremental revenue that we posted last year importantly, though 4 million of that was in the first quarter of last year and as we kind of gone through where we're at on consensus for the first quarter. It doesn't look.
Like that was considered in some of the analyst projections. So we would just encourage you go back and take that into consideration.
Great.
Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking the questions. So I'll keep to one.
Right.
Thank you it has to do with the.
Open spine surgery opportunities you've talked about a couple of times Telus cervical deformity.
I appreciate the timing and the color on how you plan to attack that I, just maybe was wondering.
If you could talk a little bit about.
With the company has learned from historical efforts to to enter some of these segments would've been the barriers why it's not a bigger part of your business now, but it scale or focus issue in the past.
And maybe Chris there, Matt, but some of the challenges you see.
We should be mindful of as you get to make a bigger pushes you described.
Yes. This is Matt link I'll take that look I think what you've seen historically was a bit more of a blue ocean approach to.
Unique or novel segments, specifically and am I asked in lateral as the company's grown and really.
Built out the portfolio to compete in the full line spine company, we've decided to focus in these these other more conventional area that you described like cervical and Tivo.
I think the major opportunity for us is to leverage.
Our internal capabilities around procedure realization to develop comprehensive and complete clinical solutions.
Regardless of whether it's an open or am I asked approach than we've seen that.
As a driver in that segment in particular, which we have had a number of new product offerings.
That we introduced to the market over the course of the last two years. After the procedural sedation is a key component you hear us talk a lot about the advanced material science so.
Advancing material capabilities to enhance biocompatibility and provide clinical characteristics that surgeons desire in these devices, so whether it be titanium pay.
Titanium based modulus.
Device or the cohere poorest peak, we see that is a a meaningful differentiator and drive our crop that segment as we've touched on in Empire conversations are advanced material science.
Innovation really applies across all Interbody segments that you can bridge that up into the cervical spine as well, where we've seen growth in adoption across our co here of course peak as well as our modulus cervical platform and as we've talked about I think theres that huge opportunity for us to round that out procedurally with the product introductions that Chris.
Referenced earlier, the anterior cervical plating and post year cervical fixation system and again, taking I think a novel approach towards proceed realization and looking at not just the fixation component and the antibody component, but really instrumentation access just as we have across our entire portfolio. So again I think really low.
Leveraging the the historical experience Dropless utilization and product innovation is key.
That's great. Thank you.
Right.
Our next question comes from the line of Richard Newitter from SVB Leerink. Please proceed with your question.
Hi, Thanks for taking the questions.
The first one just going back to Paul's Chris can you remind us what your prior benchmark or milestone timelines were for both components to the pulse.
Initiative, both the robotics and the regular.
Thank you had given us when we can expect first in man for the robot and and when reasonable timeframe for approval might be and then commercialization and then the same thing just just for pulls from minus what had been and then exactly where it is now thanks.
I think rich.
No I think you have the numbers exact yet so.
The original timeframe. This is not link again was was focused on the pulse platform.
Commercialize full commercialization and 2020.
We never really provided more detail timeline around pulse robotics, then targeting first in man the back half of 2020, and Thats really all that guidance, we provided on the on the robotics platform beyond the unveiling last fall.
Okay. So I guess.
It is that first in man in the back part a 2020 off the table now or that potentially kind of hold.
Yes, so for Christmas comments earlier, we run these development processes in parallel.
Again, just to kind of re frame and reiterate for everyone. The the concepts or philosophy behind the poll system is positive then ecosystem our platform of applications of which robotics is an application, albeit a major line. It had an application. So its development pathway continues to run.
In parallel concurrent to the current pulse.
Evaluation efforts as well.
Okay, and maybe on actually 60 I'd be curious as you as you move into 2020, and you think about the.
The momentum in the opportunity to add in front of you and what drives the momentum over the next 12 months ill are you moving past Jarrett you're kind of.
Friends and family or your installed base of excellent users and what what degree should we expect the training to start to move more into non exelis users or.
And then also kind of similar type of question with respect to the pull through aspect of XC 60.
Are you starting to see an increased contribution to growth coming from.
Other parts of the overall procedure capture outside of the lateral portion poster fixation because people are adopting xsix 60. Thanks.
Yes, so I'll try to tackle that into wave so.
Like that the characterization of the customer segmentation and training on X 360.
Hasn't been.
Broken out in it from a process perspective of.
Current lateral users to X 360, new lateral users again those run concurrently so we have seen both the opportunity to expand the utility and clinical application of lateral surgery with the tools and procedural sedation of X 360, So we've expanded the utilization within existing lateral customer base.
I think also very important as we've seen pretty strong adoption from new lateral users who looked at the limitations of a standard direct lateral approach inability to access the lower segments of the spine specifically all five asked one and perhaps some of the challenges with repositioning the patient and this has created an access point for them.
Into.
The lateral portfolio and so we continue to see training and adoption.
Across those two segments of surgeons as well as against as well as with competitive lateral users again going back to I think Chris is earlier comments, we're going to continue to invest heavily in surgeon training. We're opening a brand new experienced center here in San Diego.
We're also expanding our training capabilities on the east coast as well as internationally. So.
Very focused on our efforts through our CPD, our clinical professional development program to continue to optimize the opportunity for actually sticky and as we said on many occasions. Our goal is really to expand any meaningful way the overall lateral market by making it more accessible to more surgeon customers based on the procedural solutions we.
Provided from a pull through perspective, I think weve oftentimes referred to the fact that X lift as a.
Flagship procedure.
Tends to create a strong draft for the rest of our portfolio I think you referenced in your question one of the strongest areas of pull through clearly with post year fixation, but we do see continued up uptake across other segments of our portfolio within our X 360 customers, which is encouraging.
[music].
Our next question comes from the line of Ryan Zimmerman with BTG. Please proceed with your question.
Thank you so just want to follow up on the surgical support guidance I. Appreciate there's some kind of onetime components and guidance that cloud it in the early part of 2020.
When do we get to call. It a steady state on surgical support in your view and what does that steady state look like and if you can expand.
Whether its monitoring or biologics kind of how what are your underlying assumptions for growth in say the U.S. biologics market. Thank you.
Yes. This is Matt Harbor, let me just kind of start with kind of what we see for 2020 as the drivers of the guidance that we provided today and then I'll turn it over to Matt linked to.
Provide a little more color.
As I mentioned earlier on the NCS billings and collections that revenue growth is going to normalize.
And as I said earlier, we had 10 million an incremental through billings and collections 4 million of which was and that was in the first quarter of last year.
And so we will definitely see a decline.
From that.
So we enjoyed the benefit last year.
We also are going to continue to see some competitive pricing pressures.
Within the island product line in the service businesses and so that that's also factored in there as I mentioned earlier very minimal contribution from capital sales.
In 2020.
And then with regard to biologics, while we were happy with the results we saw in the fourth quarter.
It's more likely to come into the low single digit growth and Thats also in the forecast or in the guidance we provided today.
Yes, I'll just comment.
With respect to the biologics, we expect that to sort of sort of be and range with market growth. We think we had been.
Very judicious and building out the portfolio to ensure that we can address what the market requirements are in particular as it relates to pricing with some lower priced options.
As an alternative to premium options and biologics like our stem cell biologics.
So we expect that to remain in the range of market growth and continue to manage that we proceeded attachment and other measures.
Thank you.
Our next question comes from the line of Matt O'brien with Piper Sandler. Please proceed with your question.
Afternoon, Thanks for taking my questions and I'm, sorry to continue down this path and the surgical robot, but there's a lot of anticipation for the arm components of that system and I understand pulse is very compelling but is it a fair characterization today to say that the first in man will likely be sometime in early 2020.
One for the army components and is it fair characterization characterization to say that the actual launch however limited and is going to be next year as maybe three to six months delayed versus what you may have been thinking a few months ago.
It's in the ballpark.
We're saying I think is accurate, although I still believe that our desire to have first in man potentially added this year still within the realm of opportunity.
But again.
We as we go through some of the final testing and development of the pull system and then also ultimately as where we how's the application of robotics.
We do have to keep that consideration. So I don't I don't I wouldn't I would say that what you're saying is in the ballpark, but we're forging ahead.
Full steam ahead with our with our with our robotic application.
And feel like that that the current situation with false doesn't necessarily have a material impact on our on our entrance in the market with the arm.
Okay. Okay. So saw modest delay in at the end of the we're also very bullish on the technology no major design changes needed.
Absolutely, Okay, and then on the international side of things, Chris Chris Ormat.
The 10% to 12% outlook this year midpoints, a little bit below that 14% CAGR that you've talked about through 2024, and I know you weren't specific as far as.
When we would see.
What levels of growth over that that projection period, but as you get bigger it gets harder to grow 14% per year. So.
Are we still committed to that 14% CAGR should we start to see a bigger ramp up and and the performance of that international business next year, and then and then.
Thank you 23, or how do we think about that.
Yes, it's it's obviously again the CAGR was over over a longer period of time and if you think about the 14%, it's probably more to think about the low double digits. It could swing at any given year based upon a myriad of different things I still very very bullish about the national market a lot of the work that we.
Talk about in building operational capability supports our international growth. So we've got to get our supply chain in a robust and a very operationally efficient.
Scenario, so that we can support widespread growth internationally and I think right now we're still somewhat gated at times, you've heard us talk about set availability. Some of these items are our predicates to unlock fullscale globalization efforts so to that extent.
To that to that end, our focus on driving operational efficiency and operational excellence and continuing to really build out a robust supply chain and our ability to really generate world class FINMA logistics on a global scale is a gating item for us to fully approved take AFFO full advantage of the global opportunity. So I think the story is very consistent what we talked about it.
Yesterday.
I think the growth next year is is a is a solid growth number.
And as I said as we as we build a more robust operational capability as we lost some of these enabling technologies, which will also resonate in key markets in Europe and elsewhere, I think thats, what gives us that that tailwind to that growth story in the back half of the strapped plant.
Got it thank you.
Yes. Thank you.
Our next question comes from the line of Robert Marcus with JP Morgan. Please proceed with your question.
Great. Thanks for taking the question.
Two financial ones I'll, just ask in wine.
We see where the operating margin guidance is I was hoping you could just give us a little more color on how to think about interest and tax and shares for the year and then I heard you talk about greater than 100 million and free cash flow looks like you ended up doing 112 should we.
Thats something north of 29 teens 112 million in 2020, and if not maybe just spend a minute on on where the extra spending is coming from thanks.
You bet so.
I think generally interest will kind of being in line with.
What we saw in 2019, obviously.
We do have some decisions to make around the converts.
And our cap structure, but it was around 2020 1 million. If you see what we posted on a full year basis from a tax rate perspective, we expect the tax rate to be more in line with kind of the historical guidance that we've given on the tax rate.
The tax team did an excellent job in 2019, and we did get some kind of onetime favorability in there that.
Aided our earnings per share, particularly in the fourth quarter and took our tax rate down, but as we were thinking about guidance from an earnings perspective.
We took into consideration a tax rate more akin 20% to 23% range.
Weve predictive historically I'd say shares similarly are going to be in that 51 52 million shares outstanding So don't see anything significantly moving that.
With regard to your question around 100 million in free cash flow I would say, that's just kind of arranging number to use right now we do foresee some significant capital investments.
We're in the process of making.
In the prepared remarks I'm sure you heard about some of the.
Work that we're doing here at the headquarters. We also have some significant investments going into our supply chain.
That being the sterile pack and then the European medical device regulations, so thats, putting some pressure on our capital spend.
But that really sets us up to be able to deliver on the long term strategic plan that we rolled out at Investor day. So the way we've been characterizing and internally is that.
2020 is definitely a year of investment where some of the infrastructure investments that we're making.
Is definitely going to pay off in the long term future.
Oh excuse me I must say 52 to 53 million shares outstanding.
Our next question comes from the line of Raj Denhoy <unk> with Jefferies. Please proceed with your question.
Hi, This is Anthony Ferrari.
Thank you have one on X 360, and then one on strategy.
Christian Matt just on on Threesixty, It's a follow up to Rich's question.
I'm just wondering what the penetration actually into your existing Nuvasive accounts is at this point where that can go over the next couple of years and a quick follow up on that would be what does the price and volume pull through you're seeing on those accounts and then the strategy question will be for Chris and valuable well in a long term covidien alone the state.
DNA, there had restructuring and M&A. So I'm just looking to take the temperature, there where you see restructuring and M&A playing out over the next few years. Thanks.
Yes. This is Matt link on the actually 60 penetration.
We sort of generally have spoken around penetration with respect to training in the range of say, 20% to 25% of our.
Existing customer base and so we continue to expect to build on that and we'll do so through the investments as mentioned previously as we talked about the sort of.
Pull through our attachment opportunity associated with excellent because we tend to see higher values per case based on larger procedural capture Thats also reflected do often times more levels for case and so those all continue to be strong.
Tailwinds with respect to the overall X 360 portfolio performance.
Yes. This is Chris on the on the strategy question.
Think about I came in roughly 16 16, there's some months ago and and only wanted to get an understanding of strategic levers that we were going to pull to grow the company and as we sort of.
I was we've articulated those over the past year and really put a finer point of Investor day. It to me sets up the runway for us that in booking become much more active M&A. So looking at how do we accelerate our focus on them is through furthering our portfolio around lateral potentially further equipping our system Navex risks are ours are pulse.
Pulse with robotics equipping that with other key technologies.
We clearly feel like we've got a significant amount of runway in the open surgery segments, we've talked about cervical and deformity and we're actively looking at opportunities that we could proliferate our portfolio through M&A and business development in that area and then broadly the globalization front.
How do we accelerate our globalization efforts to really get out ahead of some of the commitments that we've made two to deliver the growth we've talked about back in August so I'm I'm bullish I feel like we've got we sort of taken a bit of a bit of a breadth over the last year, but I don't expect that continues so so I'm anxious to two to two really consider.
Our M&A as a primary lever that we pull to really grow the business as far as restructuring I will turn over to Matt tourism at Harvard. Thank you for the question.
I'd say a couple of things that we're going to be very focused on which.
Goes back to the DNA, you mentioned between Chris and I.
We are definitely going to very much focus on the underlying profitability of the businesses both in the United States and around the world make sure that we're delivering returns for all the effort that we put in Seoul those countries.
We are going to look at our Opex and look at optimization and some of that may actually require capital investment through in other areas, but we're thinking long term, we want to deliver on the the long term strategic plan that we laid out last year and in order to take out some costs, sometimes you have to invest in order to to get the return.
But we definitely will take a look at Opex I'd say, we also are very focused on manufacturing we've seen good results in 2019, particularly in Ohio, but theres more work to be done there to mine more efficiency out I think we've made really good progress, but theres more to come in the coming years. So the answer.
Your question is yes, we are going to really be focused on optimization.
Thank you.
Our next question comes from the line of Sjogren thing with Wells Fargo. Please proceed with your question.
Thank you so much for taking the question I have one on the cadence of operating margins.
You can you give us the magnitude or help us understand how you're thinking about the contraction in the first talk relative to the expansion in the back half and.
India. We I guess you guys had stated expectation was that it would be investments in the front tough which will drive.
You too would your goals in the back half.
So how should we think about to step up in margins. In 2021 is 50 to 70 basis points still the right ballpark and then plus hundred basis points thereafter. Thank you.
Yes, so from an operating margin perspective, I would point you to our guidance today, particularly on a non-GAAP basis of 15.8 to 16.2, that's going to have significant pressure in the first two quarters that being the first and second.
You know.
We believe that the 50 date is a bit of a floor on a full year basis, but theres a lot of expenses that were going to see in the first half that we'll work our way through in particular I would highlight stock compensation of it will occur in the second quarter and that correlates with the share price and so that will have to work our way through.
We're going to continue to invest in poles to realize the opportunity there. We've got sterile pack, we've got the you medical device.
Infrastructure investments that we definitely need to make that we're making as we speak and so is your modeling out the year you should be.
Putting pressure on that operating income in the first and second quarter, and then seeing a lift in the back half of the year.
As we kind of work our way through some of these issues. The other thing I would add that's also helping us in the back half of the years, new product introductions, which is going to also help us on the topline, but also it will bring more margin in which will help us offset some of these expenses. So it definitely is a back end loaded plan.
As far as the strap land.
We're still committed to that to the to the guidance, we gave and as the Investor day of really driving that that 20% number by 224, So I'm always hesitant to give an exact number in outer years, but but I like where we believe the investments we make over the course of really we made over the course wondering teen into 2020 set us up for more.
As an expansion as we move forward.
I got it and then if I could just follow up you MDR.
It gets implemented in the near future here.
Just wondering how does it back.
Your latest thoughts and also how does it impact your international strategy.
Especially as you do you see or Youre skews and you likely exit some product lines. Thank you for taking the questions.
Yes, good point.
Actually right it does impact our strategy it forces us in an area that in the short term mckesson expense associated with you're seeing that reflect in our numbers this year.
Where we're we're having to streamline the portfolio or having to build their packaging capability and obviously having to put forth resourcing.
To just comply into to ensure is already all the all the documents and all the the regulation around the MDR are an order over time. It does it does create a scenario that that I think we think allows us a chance to have a more streamlined portfolio based upon the expense burden.
That youve that you will incur I'm, having a broader portfolio in Europe I don't think that's a bad thing I think thats actually a good thing, but in short term, it's a challenging scenario.
But it's definitely as you think about our focus going back to what I've talked about.
With globalization being at primary growth engine that is contributing the single biggest source of revenue for us over the five year period.
It's existential for in our opinion, we we've got to we've got to fully participate in European markets and obviously by participate in European markets. We participate in all the C. Unmarked countries that that that adhere to the C regulations CE Mark regulation. So.
You are definitely it you're definitely right. It does create a streamlined portfolio going forward, but but it does create a bolus of expense in the short term that we're having to overcome.
Thank you so much.
Thank you.
Our next question comes from the line of called Crum with Suntrust. Please proceed with your question.
Hi, guys. Thanks, so much for taking your question Tom. So one went on the robot and then one on those spinal implant market.
First on the robot I mean, I know your customers start really excited about the robotic system and your reps are excited about robotics. So how do you manage that excitement and surgeon expectations ahead of the lines are you guys are you warming up your current customers right now what sort of timelines are you giving them.
And are you finding they're willing to wait for for your robotic application.
Yes. This is Matt link looks so we acknowledge that.
There has been the market for robotics I think you also have to be measured and take a step back in.
Yes, what is the current capability and what does the desired future state and as we've said all along with Paul Thats really that's really been the road map is building a platform and applications that have.
Broad clinical utility as we were referred to 100% spine cases that provide inc. incremental clinical decision, making capability and clinical support.
Through the integration of those applications and then that becomes a foundation for future robotics application. So.
If you look at a market today.
There is still relatively lightly utilized with respect to number of cases in the percent of the case that robot can participate in I think we hear consistently from our customers that desire to have.
An application or flatten with broader clinical utility in that that's what we're seeking so.
As we referenced earlier were good 10, you're going to continue to build towards that.
I'll just add on that that that the way, we're kind of warming up our customers is very much in line with what we've always done you got to think about the enabling technology simply robotics is an extension of our card personalization strategy, where we make sure that we have world class instrumentation to provide access we ensure that we've got a robust portfolio that we that.
We focus on advanced materials science to increase to really provide workless interbodies, we surround that with technologies like biologics and some of the work we've done there and we continue to hone in and and fully round out our portfolio and increase the effect as our portfolio fixation. So we continue to tell a story that says that robotics is a part of our.
Solution and is not a independent strategy. It is a part of our procedural sedation strategy I think it resonates with our customers I think it resonates with the market clearly, we're anxious to to cook to really solidify that proceeds position strategy by having pulse and robotics, but I think I think we're ahead of the I think we're ahead of the pack in many ways with procedural sedation strategies that we put in the markets.
Thus far.
Got it okay now that that makes a ton of bonds.
And then just kind of high level on just the spinal implant market.
Sure, yes for for any out of ordinary puts or takes you are seeing are sharing.
Just giving me tighter neuromonitoring, yes, specifically it seems like there's more conversation about spinal cord stimulation moving.
In the treatment paradigm.
And then now physician guideline never put out a little less than a month ago back pain.
Does that sort of index threed on fine. So just kind of generally speaking what what you guys are hearing or seeing there might be different there.
Yes, so we haven't seen any material disruption or shift in the market as we've commented in prior calls and conversations we see the market is stable.
Nothing that at this point, we've seen to materially change out while we certainly recognize that alternative therapies and in particular other conservative.
Measures interventions are appropriate with respect to managing and treatment of low back pain in particular.
Theres still I think a well established.
Segment that is indicated appropriately for spinal surgery and we also we believe with the advancement of our technology platforms. In particular are on the EMI aside and enabling technologies. When you can continue to facilitate a more reproducible unpredictable intervention.
Theres opportunity to address a wider patient population that is probably indicated for surgery. So at this point, we see it a stable, but we'll continue to monitor the market conditions.
Thank you guys so much.
Thank you.
There are no further questions I'd like to hand, the call back to Mr. Barry for closing remarks.
Thank you Doug and thank you all participating in our earnings call today with guidance expectations set along with the strong five your business strategy in place I'm optimistic about the future of Nuvasive and the value we can deliver to our shareholders. We look forward to speaking with you next quarter. Thank you.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.