Q2 2022 Alphatec Holdings Inc Earnings Call
And so I would tell you. This is a very active place in our surgeon education group as it is.
Seasonally busy and the other thing that's been fun is just I would tell you a.
A a competency of the group is applying our learnings and some of the learnings around PTP will be integrated in terms of what we do with regard to our lateral transfer of surgery. So applying our learnings is something that we love to do we're also seeing more utilization in them in complex surgery, and it's starting to be fun to be able to see.
19 peer reviewed publications that further validate the clinical thesis for.
For for PTP.
So once that publication.
It was a study of SCP monitoring for femoral nerve health. During PTP. This is an example of designing a procedure from the ground up if theres a documented risk a femoral nerve complication in lateral surgery. Our view is that you should develop a technology that detection so as to avoid it.
So when you start talking about procedure realization. This is a foundational requirement, it's not our retractor and an implant its technology and ultimately assist the surgeon. The study showed that safe op <unk> enables actionable nerve health monitoring the historical chart for gathering SSE piece has been these are very very small signals and capturing has been.
Difficult and so we were able to capture the signal through.
It's actually signals through amplification, and then provide real time actionable information through providing a moving average and so the way that <unk> does is that again.
Again, it amplifies the small signal provides the information real time.
And it takes in the computer takes predefined parameters and classifies the way for them. So a very predictable automated tool that ultimately makes for safer surgery, which again, we think is foundational requirement for doing things in a sophisticated way so.
And it's getting to the iOS scorecard I still get to meet a surge who doesn't want on iOS.
Really doing what we intended which is providing cross selling opportunities and hospital access.
Q2 revenue was $12 million.
Pro forma revenue growth was around 49%.
There is approximately 450 iOS.
<unk> installed.
And 40% growth in pipeline since the acquisition closed as I as I previously stated and it's the highest unit orders since acquisition.
Lows.
So.
<unk>.
Yes, we will just continue to expand our information based competitive advantage I was with our marketing and engineering team yesterday, Mike Aaron and Abby and they were just showing me some of the images that have come into the portal and I can't tell you how exciting it is to start to.
See and understand the type of thing that comes.
Over the the worldwide web in terms of into the cloud portal and just to continue to see the building of our informatics system with regard to live.
Imaging and just the ability to use that information clinically use it operationally and use it economically is very very apparent to us and again I just can't be more excited about what we're doing from.
From an <unk> perspective so.
Our second commitment is really around compelling surgeon adoption and it's clearly happening I think 23% growth in surgeon user base year over year, I think I stated that granted 150 surgeon attendees at training events.
10% year over year growth in average revenue per case.
So more complexity more products and then more product categories.
Surgery as well and so.
We believe this.
As reflected by into our <unk>.
Clinical thesis, meaning the products per surgery, and the number of products per surgery is that reflection and we think this is a great way to to really reflect our buy and it continues to rise and I think.
Things like PTP continue to.
To lead the way.
I think lastly, but but surely not least is what we're doing in the field with regard to our sales force.
Some companies are growing by adding distributors were growing by both increasing revenue in established territories think of it really as same store sales at a year over year rate of 25% again. These are objective elements that reflect a buy into what we're doing so not only are we driving revenue by creating bigger businesses. We're also.
Doing it through adding new distributors as well 34.
Cent of our territories are larger than $5 million and I state that because I. So vividly recall years ago, when we talked about getting to $200 million and we said gosh, it's going to be approximately 50 agents doing $4 million.
I'd tell you that that's more than happened and it's going to continue to more than happened and so clearly.
That has happened and we continue to compel adoption and it's in a somewhat undeniable. We also see an increase in average case revenue, which is really a reflection of confidence. So we always talk about creating confidence based upon clinical aptitude and that seem to be going on based upon seeing some of the demographics associated with an increased.
Case revenue so.
Anyway, we're doing this while we elevate the clinical attitude and our sales force.
And a footprint that is still under.
Represented and so from our view opportunity abounds and with that I will turn it over to Todd.
Well, thank you Pat.
Good afternoon, everyone.
We appreciate you joining us this afternoon, so I'll begin with revenue second quarter revenue.
Was 880, <unk> was $84 million, reflecting 35% growth over the prior year and a 19% improvement compared to the first quarter of 2022.
The $84 million in revenue is comprised of $72 million inorganic revenue and $12 million of <unk> related revenue.
Quarter organic revenue of $72 million increased 30% compared to the prior year.
Which is probably our most difficult quarterly comp given the very strong performance in Q2 of 2021 year over year volume growth of 17% was driven by the continued expansion of surgeon adoption with surgeon users, increasing 23% compared to last year much of that growth is coming from established sales agencies with at least one year of tenure that cohort achieved $25.
Rent growth in the quarter, demonstrating durable sales growth from our most tenured agents.
Average revenue per case expanded 10% year over year as revenue mix continues to shift towards procedures that feature more products per case and procedures with greater complexity.
Strength was portfolio wide with lateral biologics in a with all contributing significantly to the growth this quarter.
Deliveries in the quarter were driving $12 million of <unk> related revenue and growing 93% compared to the Q2 of 2021 and on a pro forma basis growing 49%.
Reminder, that transaction closed in may of last year, and we've continued to make progress with the integration showing strong revenue growth achieved the highest number of orders in any quarter and are seeing improvements in the time required to install new orders.
Continuing through the remainder of the P&L second quarter non-GAAP gross margin was 70% down 320 basis points compared to the prior year just under half of the year over year decline or about 150 basis points in gross margin was mix related due to the consolidation of iOS imaging, which had a lower gross margin profile than our spinal implant business.
Second is an increase in biologics revenue mix as we are seeing biologic detach rates increased significantly biologics comes at a meaningfully lower margin profile and overall business and this is contributing about 80 bps of pressure year over year. Finally increased deal service cost as we address the backlog of service calls created during the COVID-19 pandemic contributing about 40 <unk>.
Points of pressure, our expectation is that the margin headwinds outlined above will persist through the back half of the year.
Operating expense in the second quarter demonstrated leverage while we continue to thoughtfully invest in long term sector, leading growth second quarter, non-GAAP R&D was $9 million and approximately 11% of sales 50 basis points lower than prior year.
The increase on an absolute dollar basis was driven by continued investments to support organic portfolio expansion and the advancement of the iOS platform non.
non-GAAP SG&A was $65 million and approximately 78% of sales in the second quarter compared to $50 million and approximately 80% of sales in the prior year period while.
While the increase on an absolute dollar basis reflects continued in surgeon education and support for the increasing size and sophistication.
60 basis points of improvement on a percentage of sales basis. This speaks to the leverage we have begun to deliver as our business scales.
Total non-GAAP operating expense amounted to $75 million and approximately 89% of the sales in the second quarter compared to $57 million or <unk>, 92% of sales in the prior year period, delivering a total of 320 basis points of operating leverage year over year I'd also like to highlight the fact that we delivered 910 basis points of leverage sequentially from Q1.
2022.
Adjusted EBITDA was a loss of $8 million and approximately 10% of sales in the second quarter compared to a $7 million loss in 11% of sales in the prior year period, an improvement of 80 basis points as a percent of sales sequentially, we saw a $3 million or 570 basis points of improvement driven by 910.
Basis points of operating leverage partially offset by <unk>.
Sales growth drives leverage across our business. We continue to expect adjusted EBITDA for the full year 2022 to improve approximately 400 basis points as a percent of sales relative to the 12% we saw in 2021.
Now to the balance sheet, we ended the second quarter with $107 million in cash operating cash use was $40 million, which consistent with previous quarters was predominantly related to investments in inventory and instruments to support our expanding distribution footprint and new product launches included in Q2 operating cash was approximately 10 million.
And one time legal spend which if excluded would bring cash use to approximately $30 million during the quarter. We settled two lawsuits, including the patent lawsuit originally filed by an invasive in early 2018, while the specific terms of each settlement are confidential. They are fully resolved multiple future royalty obligations we have.
Pleased to put both disputes behind us.
With asset leverage and a more favorable full year adjusted EBITDA, we expect cash use this year to meaningfully improve relative to last year consistent with our long term plan.
At carrying value was $336 million, which includes $316 million of our convertible debt. We also recently signed a term sheet for $50 million revolver with a $25 million accordion feature which coupled with convertible debt offering place last year will support our baseline investment plans toward cash flow breakeven in 2025, we expect to have the revolver in place.
By the end of this quarter.
Our outlook for the full year 2022, we now expect full year 2022, total revenue will approximate $325 million representing growth of 34% compared to 2021 that includes the following we now expect full year 2022 organic revenue to approximate 200.
For the $269 million previously.
Updated expectations for growth of 31% compared to 2021 contemplate the strength of performance in the first half and the momentum with which we.
We have entered the third quarter, we now expect iOS related revenue of approximately $48 million for the full year 2022 compared to $47 million previously updated guidance for <unk> reflects the strong execution driven Q2 result.
So let me frame up.
Updated <unk> organic revenue guidance with our expectations for procedure volume growth and the expansion of average revenue per surgery.
We are raising full year organic revenue guidance due to increased expectations for volume growth, which is driven by expanding surgeon adoption and increasing geographic penetration we've.
We've achieved solid momentum in procedure volumes in the first half of 2022, including 17% in the second quarter. As a result, we now expect procedure volumes to grow at a high teens rate for the full year compared to the mid teens percent rate we anticipated previously.
Average revenue per surgery grows as our procedural mix shifts towards procedures, like PTP, and LTP, which have higher revenue per procedure than our overall average our procedural solutions are also.
City, which require more products per surgery.
Finally, the level of distinction engineered into <unk> approaches in the cadence of new product launches generally enables us to command a price premium and we continue to anticipate a high single digit.
Rate of expansion for the full year.
As most of you know our guidance philosophy is to be thoughtful and prudent about how we set expectations that we can achieve and have reasonable opportunities.
You would see in closing we have build a business capable of driving sustained sector leading growth.
That revenue growth affords us shifting a tech toward a new phase of business growth phase characterized by consistent.
Investment thesis is earning surgeon confidence and enabling us to methodically execute the plan. We know that through continued solid financial performance, we are earning your confidence too we.
We have an active IR calendar over the next few months, including the NASS conference and I hope to be able to connect with you with that I'll turn the call back over to Pat.
So much Todd.
Yes.
Really what we're doing is that we're in the middle of our share earnings strategy and that means.
Several things it means that PTP is taking share and that means we're earning more lateral traditional lateral surgeons as well as <unk> and cliff type <unk>, where traditionally <unk> approach as well as what we're seeing is applied to more complex cases, and it's perfectly well suited.
We're seeing a fair amount done in the.
In the ambulatory surgery centers.
This confidence is creating a halo effect that impacts the rest of our portfolio. We have a fantastic portfolio that gets applied based upon that.
Oftentimes the.
The entry via PTP, our sales channel is getting better and broadening and so.
That speaks to further confidence in earning share and we're dipping our toe into the international business.
In a narrow but.
But deep way and I think we've defined that.
In previous calls and that remains very consistent and so we also intend to capture the greater than $2 billion I tried to lay out a little bit about what we mean by creating predictability through a planning effort Ted at today and how that information that's going to drive better surgery, and we think that it will.
Reflecting in and just the.
Our commitment that we made at.
Our Investor day out here at <unk>.
2025 being $555 million.
CAGR and a 80 million.
Adjusted EBITDA breakeven in 2023, and the protection situation at a disciplined investment that will deliver a cash flow breakeven without additional drilling.
That so our opportunity.
<unk> to address the need for predictability and reproducibility is massive what is the nemesis of spine is the volume of variables you have to control and so we know that spine surgery needs a tech.
Okay.
Thank you we will now open the floor up for questions and the interest of time.
Please limit yourself to one question.
As a reminder press star one now.
And we will go first to Josh Jennings.
At Cowen.
Okay. Thanks for taking the question.
I appreciate all the detail you guys shared around volume growth expectations for the remainder of that.
Help us understand the recent procedure volume trends that you've observed to date that underpin those assumptions what sort of month to month.
Month over month improvement have you seen through June July and now into August .
Eric Good afternoon, and thank you for the call.
Really when you look at our volume.
I don't think we're going to get into the Nitty gritty of month to month, but I can tell you that we exited the quarter in our entered the third quarter with kind of the same.
So in the second quarter and so.
We definitely saw an improvement sequentially from Q1 to Q2 in terms of volume.
I think we're it's really on that basis that that we raised our guidance.
The way we do.
Did really on the back of incremental <unk>.
Unit volume growth.
We will go next to Matt excuse me Mathew Blackman of Stifel.
Hi, This is colin on for Matt.
Just one on iOS.
Appreciating the precious hospitals are facing given the challenging capex backdrop could you walk us through how these dynamics really affected <unk> placements in the quarter end.
How that factors into the res def's guidance as well.
Thank you.
Yes, I'll, let I'll, let Todd.
Take the guidance one bit.
We're still early in the whole iOS.
Right now a huge headwind.
So we're such a small player in the volume of units, we need to place to be relevant.
Dynamics that'd be it.
Hold on the cash, but again I think what we are.
<unk> is our ability to gain access to an institution with regard to.
Our perpetuating a relatively.
From a recession proof business and the implant and so that's kind of how we see it from a.
I'll pass it on the top of our financial year.
I think what we saw was a record number of orders in the quarter.
Surely see.
Headwinds.
We're very pleased with where we're at in terms of.
So the number of orders in the period.
Relates to the guidance really what we did was.
On <unk> overall.
By about six in the quarter.
Sure.
Five of that being in organic and $1 million.
And so we've really raised in the second half.
And has held the <unk> guide.
And so thats really how you should kind of read through our guidance and the performance.
We will take our next question from Dave Ron Ahmed at Canaccord.
Okay.
Great. Good afternoon. This is Brian on for Cai I. Appreciate you taking the questions and congrats on another strong quarter, maybe just to dig in a little bit further on <unk> just curious in terms of.
So what you are seeing between purchase and an earn out dynamic if you're relatively sort of agnostic to the two and then secondarily with the broadened hospital access just how deep.
Is some of that cross sell and pull through opportunity in these.
Yeah.
Okay.
It's early goings.
The vast majority of sales that we have.
We're getting outright purchases and private.
Offices in groups.
Right now as well and so.
No.
I think Walter.
We are seeing is a place like Texas back.
Okay.
Or are those types.
<unk> is has been.
We're somewhat agnostic as you see.
Stay in and also I think you did a good job framing the question, which is it's the early innings.
In the.
In the quarter, we saw places like.
We'll cornell.
Ortho Indy Ortho Indy is like the perfect example of a place that need to hit both from our spine and a total joint utility perspective.
Also.
By acquiring these things clearly.
That's just a few of them are really a who's who and again back.
Years ago, when we had challenge getting access to some of these institutions based upon this being a previously broken company. This is such a.
And have a great day get from me, but just a little bit of color and I think I would add to that over time, we'll be able to measure will act.
They place. These units we can measure the impact on increased volume from places, where we haven't been that will kind of happen. After we placed the unit, but what's nice to know is that the leading indicator here is that these units, where we're getting orders for where we don't have access with the order were good.
The access and sector.
The value thesis is manifesting itself.
Okay.
And we'll go next to David David Saxon at Needham <unk> Company.
Hi, guys. This is Joseph on for David Congrats on the great quarter.
<unk>.
Okay.
Sure first for cash burn and potential EBITDA breakeven.
Yes Joseph.
I think as we laid out.
Okay.
May.
2023 is expected to be cash flow breakeven.
And.
Then this year.
And so I think we're a bit early to put up.
The number on it but we're certainly going to improve but the key here is getting our adjusted EBITDA.
Improving in <unk>.
And breaking even next year and I think what what gives me confidence is our sequential improvement here in the second quarter, where we saw pretty significant improvement both in dollars, but in terms of the percentage leverage that we saw from Q1 to Q2.
Our confidence and ability to see continued improvements throughout the throughout the year to achieve really the commitments that we laid out from a long term plan standpoint, and so I view, our second quarter performance here is completely consistent with our expectations relative to what we laid out in our long term plan.
Hi, This is Phil on for Amit.
Youre still pretty nascent eliminate accounts.
The year end, but staffing challenges and issues related to Covid, it's still amounted to mature.
The reality for a lot of other companies that are more mature in nature and so I'm just wondering.
What are you seeing in the environment.
And basically the question is do you feel like you would be growing faster if conditions were slightly different right now in enabling under the top end to continue to grow.
Gotcha. Thanks.
Yes.
It's kind of interesting is I don't think the environment that we participate in is any different than anybody else I don't care, how big the company is still kind of that that ebbs and flows.
The difference is there is a share taking dynamic going on that.
It is very apparent and and so what we're doing is we're growing through it nice ability associated with the environment that we're participating in that everybody's got the same.
Dynamics.
And we will go next to Dan <unk> of Piper Sandler.
Can you hear me.
Yes. Please go ahead.
Yes.
Squeezing me in at the end here and congrats.
That's on the quarter just to ask a quick one is there any update on the <unk> front follower.
Yeah.
As you appreciate.
This is a one by one by one by one basis.
And so we celebrated our PTP in New Zealand and so.
Not much of a.
An update in Australia.
We're not in yet, but the Australia, New Zealand team is really kind of outstanding we.
We have a very.
High class opportunity in those two places we can't wait to be able to get 24 is what were looking.
We can add and then yes.
The Brazil, but I think we're going to stay narrow and deep in but really not a we're still just getting going down there.
And flows.
And that part.
In a world that hugely excited about what's going on.
So on <unk>, we have the right leadership in place here and down there for the opportunity.
Thanks for taking the follow up.
I don't believe I heard during the gross margin.
Inflationary pressures and input kind of product cost I was just wondering if thats something that youre seeing especially.
So much if you're having any difficulties.
If you look availability or costs are notably elevated.
From a cost standpoint, I mean, there are some costs.
Pressure baked in there.
I think.
The big items.
Those are the major items that.
That we've seen but we're not immune to the.
The cost pressures that that everybody else is seeing out there from an inflation standpoint, and we're working through those and I think again, what what's different from us as we are growing through some of those.
They definitely are there and we're working to navigate them.
And that does conclude.
Today's question and answer session and todays webcast. Thank you for your participation you may now disconnect.
[music].
Yeah.
Okay.
Sure.