Q1 2024 Alphatec Holdings Inc Earnings Call
Good afternoon, everyone and welcome to the webcast of apex first quarter financial results I'd like to remind everyone that participants on the call we will make forward looking statements.
These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed in documents filed regularly with the S E T.
During this call you may hear the company refer to non-GAAP or adjusted measures reconciliations of non-GAAP measures to U S. GAAP can be found in the supplemental financial tables included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful.
<unk> investors.
Today's call will be <unk>, chairman and CEO, Pat miles and CFO, Todd Koning now I will turn the call over to Pat miles.
Patrick S. Miles: Thanks, So much Deseret and welcome everybody to the Q1 2024 financial results call.
We will be making some forward looking statements and so I would ask you to review that.
At your leisure so.
Patrick S. Miles: A quick review of the Q1 2024 highlights our we're.
Patrick S. Miles: Establishing a foundation to deliver a profitable long term growth I'm pretty clear $138 million in total revenue, which is a 27%.
<unk> revenue growth.
Patrick S. Miles: 450 basis points of adjusted EBITDA expansion.
Patrick S. Miles: 30% surgical revenue growth.
43% mm surgical volume growth of.
Patrick S. Miles: 6% growth in average surgical revenue per case.
And so from an adoption perspective of 150 surgeons trained in the quarter that.
It drove a 21% increase in surgeon adoption.
From an investment in revenue generating assets, we continue to invest in a market that is either apathetic or disrupted without an expanded asset volume you cannot support in market that clearly demands a tech so we deployed 60 million.
Dollars to enable a growing sales team to serve an expanded surgical volume. So speaking of the sales team. We are confident in the robustness of the growth as we continue to see outsized.
Growth in in especially our established territories, which was a 28% growth. The same store sales. So we think that's a great statistic.
Patrick S. Miles: We often are around here to talk about how the spine market need data.
Patrick S. Miles: And then a ticket is different.
One of the key drivers of what makes us different is that we are 100% spine focused.
Patrick S. Miles: Imagine that much like our surgeons is always concentrate is spine. So.
Being a spine only focus ultimately gets reflected in knowhow in the when we talk about Knowhow, we mean sophistication and we mean unmatched mechanical imaging navigation and neuro monitoring expertise.
When you have know how ultimately what you do is you create clinical distinction, which ultimately compels adoption. It compels adoption from surgeons as well as attract salespeople with ultimate are interested in being aligned with your with your efforts. So what we know to be true is that surgeons desire architecture of procedures not widgets and so what we do is we.
Patrick S. Miles: We assemble fully contemplated spotless spine procedures from the ground up.
Patrick S. Miles: The the spine world is.
Patrick S. Miles: The spine spine surgery is a world where there requires management of many many variables and our belief is that objective measure through informatics can bring about in an environment, where these variables.
Patrick S. Miles: Variables are a much better managed.
Patrick S. Miles: You will find us to be a deliberate bunch. So we always say our best is yet to come and it's no tagline and so when you start to look at the growth drivers associated with a company. It's very clear that the opportunities are abundant and so when you look at the graph and you start to look at what are our participation in lateral it has been it has really been the growth driver.
Patrick S. Miles: Of our business and you'll see everything above that the iOS informatics Valens international and the U S sales force all our incremental growth drivers to our strategy.
Patrick S. Miles: <unk>.
The great thing is is things.
Patrick S. Miles: Things are progressing things are progressing as we intended and our bullishness in terms of perpetuating. This this growth profile is in front of us and so what I like to do is update each of these areas real quick in and kind of give you a perspective as to kind of how we see the landscape and so I think something to appreciate it.
Patrick S. Miles: As lateral really is the most coveted submarket in spine.
Patrick S. Miles: It is why lateral leadership for US is so important is growing faster than the overall spine market and.
Patrick S. Miles: It's been really verified by 500 peer reviewed publications that reflect has many advantages.
Patrick S. Miles: Our team is the group of people that created lateral surgery. So.
Patrick S. Miles: We are steeped in the understanding of the technique.
Patrick S. Miles: And we are committed to the requirements that really best equips us to make for the.
The biggest impact in this space and so our enthusiasm around lateral surgery.
Patrick S. Miles: Is is significant and it will continue to be a growth driver.
Patrick S. Miles: When you originate something you tend to have a much better understanding of its requirements.
Patrick S. Miles: The one thing that we know absolutely true is that neuro monitoring really automated neuro monitoring is an absolute requirement of.
Patrick S. Miles: Of lateral surgery.
Patrick S. Miles: When you start to think about the relevant anatomy in lateral surgery. What you must know is that when surgeons do lateral surgery. Their concern is the femoral nerve the nerve plexus and what stands between the skin and the spine of concern is the femoral nerve and the plexus.
Patrick S. Miles: When when we originated lateral surgery. What we did is we used <unk> to identify where the nerve was that was very important information, but the question becomes is are you willing to to evolve the technique in a way that enables you to not only identify where the nerve is but monitor that nerve over time and so when you think about.
Patrick S. Miles: <unk> nerve location that's E. M. G. When you think about monitoring the nerve overtime. That's SSE P. One of the core distinctions of Alphatec spine is our perpetuating understanding and application of Knowhow to evolve neural monitoring so what we've done is we've not only automated <unk>, but we've automated.
Patrick S. Miles: SSE piece it is a clear distinction in addressing the areas of greatest concern of surgeons and you can see that if you. If you look at the complications profile of lateral surgery. It's reflected in neuro related complications if youre going to continue to get better in that space you need to.
Draw and objectivity to the very challenging.
Patrick S. Miles: Challenges that are associated with the approach.
Patrick S. Miles: Sure.
Patrick S. Miles: Okay.
Speaker Change: It's it's it's fascinating.
Patrick S. Miles: To look at the historical leadership.
Patrick S. Miles: Which was really the historical leadership in lateral which was defined by neurophysiology. The challenges is the historical leadership in lateral surgery.
Patrick S. Miles: Hasn't evolved the same monitoring modality that a 50% market share holder.
Patrick S. Miles: Users is the same when they used back in 2003, but the opportunity for us to distinguish ourselves in this space has been reflected and that's why we are so bullish with regard to.
Patrick S. Miles: Two our continued growth.
Patrick S. Miles: And also so.
Patrick S. Miles: Clear of it that our growth profile is no coincidence and so save up is the foundation of the technique and why we're so bullish in terms of in terms of moving forward.
Patrick S. Miles: So the reason why other companies haven't done sophisticated things in spine neuro monitoring is that it's very very hard.
Patrick S. Miles: E. PS are very small signals interpreting them among the electrical noise or is profoundly challenging that is why the algorithms that interpret them are not only well protected from an IP perspective, but also integrated into the corporate knowhow or trade secrets of the company.
Patrick S. Miles: We have the four most neuro monitoring design development expertise in the business, we are greater than 60, neuro monitoring experts continually advancing the technology. We have 11 peer reviewed clinical publications on <unk>. We have 50 to shave off patent was granted globally and 45 pending and so we are steeped.
Patrick S. Miles: Knowhow and we have protected this area because what I think we understand it's relevant.
Patrick S. Miles: People often ask me whether someone can copy P. T. P&L TV my responses that can copy certain elements of the procedure, but what they can't copy is the sophistication of understand that technique and how we integrate the tools, but also.
Patrick S. Miles: There is no replicating the neuro monitoring aspect of that is the great distinction.
Patrick S. Miles: It is the demonstrate a proxy for great lateral outcomes and leadership in this space and so.
Patrick S. Miles: When you start to think about.
Patrick S. Miles: US as a company the one thing that we won't do is sit by Idaho.
Patrick S. Miles: We have the leading most of all lateral franchise in the business, but we are nowhere close to being done we're applying all of it all but we have learned into what's next we have in excess of 230 product development engineers completely committed to continued innovation that that goes into.
Patrick S. Miles: The iOS platform that will ultimately drive and alignment influence it'll be the Valens, which is our navigation robotic platform that will ultimately elevate the precision. It includes evolving our safer platform with automated any piece, which will give a better understanding of motor evoked potentials and <unk>.
Patrick S. Miles: Canada, the motor health of the nerve during the surgery.
Patrick S. Miles: It also expands the indication when surgeons.
Patrick S. Miles: Initiate.
Patrick S. Miles: Initiate the utility of a new technique oftentimes they start in the most simple application the beauty of our growth profile forward is the expansion into things like core <unk>, a larger influence in deformity and so just the opportunity to continue to expand the space in a way that that from an application standpoint that.
Patrick S. Miles: Is completely apparent to someone who's been in this space for a long time.
Patrick S. Miles: I think the other the other growth driver is that.
Patrick S. Miles: We have Oh, we've talked about the market size in the bilateral market is a place that we're making impact and so we consider ourselves in the approximation of a 12% market share holder in the lateral space, but we're also expanding the space in a way that ultimately we are seeing.
Patrick S. Miles: <unk> P T P utilized and what historically would be more post your approach type techniques and so the T live and cliff market is being disrupted by PGP in our lateral contribution to to surgery. So when you create confidence with surgeons.
Patrick S. Miles: By offering them something that they haven't done before oftentimes what it does is it expands the utilization of other products and this is what we call the Halo effect and one of the great things is when you look at the revenue profile of the company Youre seeing that happen you're saying.
Patrick S. Miles: Our robust utility of our lateral products and what Youre seeing is is the expansion into as I say, the the halo effect of the other techniques.
Patrick S. Miles: Another driver in incremental driver is iOS.
Patrick S. Miles: Love, what we're doing on the iOS front cannot be more excited that we are we have our iOS insight launch we committed that Q2 'twenty for Q2 'twenty four is coming to fruition. It's a software solution that has been in development for for as long as we have own iOS. So we started off defining how to ultimately integrate the tool.
Patrick S. Miles: Ah the tools relevance in surgery, and that's happening as we speak so insight as the new feature set that will make possible all the all the capabilities of not only automated surgical alignment.
Patrick S. Miles: Ottoman automated surgical planning, we will integrate patient specific implants with it.
Patrick S. Miles: Drive the reconciliation into the into the operating room and.
Patrick S. Miles: Ultimately drive eight assessment and follow up effort.
Patrick S. Miles: What what that drives ultimately is a is a assembly of data.
Patrick S. Miles: That I think is is.
Patrick S. Miles: Currently underway, but wildly under appreciated we recently earned.
Patrick S. Miles: Hi Trust attestation.
Patrick S. Miles: That enables data housing and sharing of de identified data, we're the only company automating and capturing standardized images.
Patrick S. Miles: Clinical data.
Patrick S. Miles: We believe will improve patient care.
Patrick S. Miles: We believe that this will bring about a greater predictability. So use is also a great moat it as a technology near impossible to replicate.
Patrick S. Miles: We have close to 90 patents granted or pending worldwide.
Patrick S. Miles: No.
Patrick S. Miles: At least the way we think about them.
Patrick S. Miles: <unk> is much the way we think about safer.
Patrick S. Miles: From an influence perspective.
Patrick S. Miles:
Patrick S. Miles: The pressure.
Patrick S. Miles: Save up is to lateral with Eos is to alignment.
Patrick S. Miles: So.
Patrick S. Miles: We believe that automated neuro monitoring.
Patrick S. Miles: It will ultimately provide an objective source of information that drives clinical decision, making we believe the same with regard to years where the.
Patrick S. Miles: The alignment information will drive an objective information to drive improved decision making.
Patrick S. Miles: Way too much gestalt in in spine surgery, and so the opportunity to too.
Patrick S. Miles: Two.
Patrick S. Miles: All the current standard if you appreciate the current standard it's somewhat underwhelming. So most of the alignment planning is.
Patrick S. Miles: Literally done by get stalled.
Patrick S. Miles: If somebody does plan, it's oftentimes time consuming it's arduous its uninformed and so what happens in surgery. If you. If you think about alignment surgery bring the greatest quota to a long term successful outcome and people are utilizing their historical gestalt there suggest a variable to that F.
Patrick S. Miles: That that is in our minds unacceptable and so what we're bringing to bear with regard to iOS is a standard and so the opportunity to automate the calculations in the create simplicity. So that so that we alleviate the surgeons' work in creating this.
Patrick S. Miles: Alignment opportunity.
Patrick S. Miles: Again appears like a very apparent opportunity to mitigate some of the variables that ultimately drive predictability and so we're super excited about that.
Patrick S. Miles: G. Though is what you have to do is you have to integrate into the operative experience and so we have a tool that will ultimately enable.
Patrick S. Miles: Enable us to take the.
Patrick S. Miles: <unk> preop automated alignment the surgical plan and integrate that into the operating room. So the two places that will be affected from an interoperable perspective, as we will have patient specific implants that will have been contemplated via the preoperative plan, but we will also have an automated reconciliation tool in the operating room to assist in refi.
Patrick S. Miles: The alignment to the reflected plan.
Patrick S. Miles: And then what will what Youll see is the opportunity to collect all of that data and have it provide a predictive analytic.
Patrick S. Miles: Capability that will ultimately again drive drive more objectivity. So if there's one thing that we want you to take away from what we're describing in what we're doing is we're trying to mitigate the gestalt of guessing and drive a level of objectivity that ultimate reflecting better decision, making and more predictability in surgery and I think that that's resonating with people.
Patrick S. Miles: And that's again why we're so bullish with regard to the reflected growth profile of the company.
Patrick S. Miles: Another element that is a tailwind with regard to the incremental effort that we're making is our valence platform. We acquired it about a little over a year ago, we feel great about where we are with regard to the design and development effort.
Patrick S. Miles: We have already started the place pedicle screws with our system.
Patrick S. Miles: Really the ultimate.
Patrick S. Miles: Reflected value will be as we integrated into the workflow of lateral our enthusiasm to do that is significantly high the progress that we've made is exactly what we intended and so our bullishness with regard to that technology and the incremental benefit to that is very apparent.
Patrick S. Miles: Another tailwind to our growth is international.
Patrick S. Miles: The one thing that Todd and I committed to do to do is to be narrow and deep within markets. If you look at the markets that we're participating in that's exactly the tact that we've taken Australia and New Zealand is doing outstanding the team in Australia, and New Zealand is outstanding if you start to look at the demographics great market size, we started it.
Patrick S. Miles: <unk> revenue we.
Patrick S. Miles: We have 40, we had for over 40 surgeons attendant in essence a lateral.
Patrick S. Miles: Tank.
Patrick S. Miles: We have 20 surgeons trained I think the great statistic on this page is the 400 Ptp's performed to date and I think it's reflective of going into a marketplace.
Patrick S. Miles: Describing the benefits of a technique preparing surgeons to have success with it and reflecting as much in a in a in a very narrow way. So we think it's a proxy for Japan, Japan is next Japan's a large market. We so covered that market. We're super excited about that market, we have our our poster at fixation.
Patrick S. Miles: Cleared in that market.
Patrick S. Miles: We have a doctor.
Patrick S. Miles: Dr. Pimenta is highly regarded in that market and we expect a a large footprint of success to.
Patrick S. Miles: Following so just another incremental.
Patrick S. Miles: The tailwind is as we see it.
Patrick S. Miles:
Patrick S. Miles: As it relates to the disruption in the marketplace, we face an unprecedented market opportunity that commenced last fall with industry consolidation capitulation and leadership change as we look at the market, we see it as 35% disrupted.
Patrick S. Miles: Other than us the rest apathetic and so what an opportunity and so oftentimes we talk about these things when we talk about that they happen over a period of time there is a great proxy out there with regard to the Stryker K to them. It was a dynamic that transpired over multiple years I think that everybody expected all the activity happening.
Patrick S. Miles: Overnight, we are making as much progress as we can manage.
Patrick S. Miles: And we expect this to continue over the coming years and cannot be more excited about it.
Patrick S. Miles: We also remain.
Patrick S. Miles: In a in a position to where we have about a third of the U S that is still on or under covered and so we have so many opportunities that we get to expand into we have been strategically adding in southern California up in the northwest part in the Midwest and clearly up in the northeast and so can't be more excited about that.
Patrick S. Miles: Our work there there is a ton of opportunities there is a kind of local opportunities, we're making progress locally we so covet the opportunity to have.
Patrick S. Miles: Well entity within the company of people that will ultimately.
Patrick S. Miles: Fluctuate the the strategy of our company.
Patrick S. Miles: I think also as you as you start to look over.
Patrick S. Miles: Major market impact and.
Patrick S. Miles: In just two years, we begin to move the needle in New York, and Houston, and Phoenix and Chicago just to name a few it's exceedingly exciting for US we have about 6% market share in the U S. But.
Patrick S. Miles: But in our best markets.
Patrick S. Miles: Literally we have 25% market share and so we see this as one that is predictive of a of a broad opportunity that we hope to.
Patrick S. Miles: Replicate over the over the coming years.
Patrick S. Miles: And so.
Patrick S. Miles:
Patrick S. Miles: I would tell you that we are well positioned to create value and we feel great about what we are just to remind everybody.
Patrick S. Miles: Of the other commitments that we made at the yellow Pea and and then again.
Patrick S. Miles: I Love, where we are and will continue to remind you guys of these commitments, but what it is is it a $1 billion in 2027 $180 million and adjusted EBITDA, which is an 18% adjusted EBITDA margin and free cash flow of $65 million and so what that does is it contemplates 20%.
Patrick S. Miles: A 20% revenue CAGR 2000 basis points of margin expansion and cash flow breakeven in 'twenty, five and so with that I will turn it over to Pat.
Patrick S. Miles: Well, thank you Pat and good afternoon, everyone. We appreciate you joining us on the call today at.
Patrick S. Miles: I'll begin with revenue first quarter revenue.
Patrick S. Miles: Was $138 million, reflecting 27% growth compared to the prior year and flat sequentially.
Patrick S. Miles: $138 million in revenue is comprised of $123 million in surgical revenue and $16 million of yields revenue first.
Patrick S. Miles: First quarter surgical revenue of $123 million increased 30% over the prior year.
Patrick S. Miles: This growth was against a strong comparable of 55% in the first quarter of last year was the highest growth comparison, we've ever left aside from a pandemic rebound influence quarter in 2021.
Patrick S. Miles: Meanwhile, lateral was again the largest contributor growth continues to be strong across our entire portfolio surgical revenue was driven by robust procedural volume growth of 23%, which is a reflection of an increase in the number of surgeons adopt a tech procedures.
Patrick S. Miles: The increase in surgeon utilization.
Patrick S. Miles: Average revenue per case grew 6% year over year, driven by a higher mix of lateral surgeries and increased case complexity offset to a degree by improving mix of surgical surgeries.
Patrick S. Miles: <unk> revenue.
Patrick S. Miles: In the first quarter was $16 million up 5% compared to last year similar to surgical revenue view of slap a sizable 47% growth comparison is tougher since the close of the acquisition.
Patrick S. Miles: Next I'll turn to results for the remainder of the P&L first quarter non-GAAP gross margin was 71% up 50 basis points compared to the prior year. The year over year increase was primarily driven by yield improved <unk> gross margin, which is benefiting from pricing initiatives or growing U S mix and improved service operations as well as strong.
Patrick S. Miles: <unk> volumes are fueling.
Patrick S. Miles: Leverage of our Memphis distribution facility.
Patrick S. Miles: First quarter, non-GAAP, R&D was $14 million and approximately 10% of sales compared to $12 million and 11% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investments in organic innovation and development of valence robotic navigation platform that we acquired in April of 2023.
Patrick S. Miles: non-GAAP SG&A was $101 million and approximately 73% of sales in the first quarter compared to $81 million and 74% of sales in the prior year period up 90 basis points.
Patrick S. Miles: <unk> and SG&A as we expected step up in depreciation related to the purchase of instrument sets are revenue generating assets as a percent of sales depreciation increased about 200 basis points year over year, excluding that impact SG&A improved by 300 basis points as a percent of sales the significant improvement was driven as expected by infrastructure.
Patrick S. Miles: Leverage and improvements in our variable selling rate.
Patrick S. Miles: Total non-GAAP operating expense amounted to $150 million and approximately 83% of sales in the first quarter.
Patrick S. Miles: Compared to $93 million and 85% of sales in the prior year period, demonstrating 200 basis points of operating leverage year over year.
Patrick S. Miles: Adjusted EBITDA was a loss of $3 million and approximately 2% of sales in the first quarter compared to a loss of seven 7% of sales in the prior year.
Patrick S. Miles: 450 basis point improvement.
Patrick S. Miles: Leverage was driven primarily by the 300 basis points of SG&A leverage followed by 100 basis points of R&D leverage and 50 basis points of gross margin leverage the consistent adjusted EBITDA margin expansion that we're driving is aligning solidly with our expectations, giving us great confidence in our ability to execute to the long term profitability of commitments that we detailed at the long range plan in March.
Patrick S. Miles: Yeah.
Patrick S. Miles: Turning to the balance sheet, we ended the first quarter with $144 million in cash.
Patrick S. Miles: Carrying value was $527 million.
Patrick S. Miles: Free cash use totaled $70 million with approximately $60 million of that deployed as planned into the inventory and instruments that support the expansion of our distribution footprint and the new product launches.
Patrick S. Miles: At the bottom of this slide depicts that investment into revenue generating assets have stepped up and has represented the majority of cash flow use over the last several quarters we.
Patrick S. Miles: We raised cash in 2023 to capitalize on industry disruption equipping our expanding sales team with the assets they needed to serve surgeries and grow their territories. We are now putting that capital to work and we'll continue to do so throughout the year. We continue to expect cash to use cash use to approximate $100 million for the full year stepping down from Q.
Patrick S. Miles: One to Q2 and progressing towards cash flow breakeven in the second half.
Patrick S. Miles: The next slide as context to our revenue generating asset investments generally the ratio of asset investment to dollars of year. One surgical revenue growth is about 75 to the dollar.
Patrick S. Miles: For their five year useful lives those assets investments generated three extra turn.
Patrick S. Miles: And looking back to 2022 of the 75% framework was intact. Adjusted EBITDA was negative so we need cash to fund both the negative adjusted EBITDA and the investment in sets and inventory in 2023 and 2024, our long range plan forecast over $200 million of surgical revenue growth an inflection to positive adjusted EBITDA.
Patrick S. Miles: Over these two years, we are investing significantly more than we typically work to support accelerated growth in the sales team the magnitude of asset investment over that timeframe will exceed revenue dollar growth, putting us ahead of the 75% framework.
Patrick S. Miles: And from year end 2025 to 227, our long range plan forecast just under $400 million of revenue growth.
Patrick S. Miles: Adjusted EBITDA over that time is expected to comfortably surpass the investments in sets and inventory that inflection in our financial profile is incredibly important we are on the cusp of self sustaining growth with profit generation poised to more than cover the asset investment, but the long term growth of our business requires and that explains how we will achieve cash flow breakeven in 'twenty.
Patrick S. Miles: <unk> and cash flow positivity behind beyond.
Patrick S. Miles: Another important point is that with investment exceeding our general 75% framework in 2023 and 2024.
Patrick S. Miles: We are creating an asset base capable of supporting more revenue than contemplated in the long range plan.
Patrick S. Miles: And from an asset standpoint, we are well positioned to support incremental revenue growth.
Patrick S. Miles: Now turning to our updated outlook for the full year 2024, we expect continued market share expansion to drive total revenue growth of 25% to approximately $601 million.
Patrick S. Miles: That includes 2024 surgical revenue growth of approximately 27% to $536 million and <unk> revenue of approximately $65 million surgical volume growth will be the greatest contributor to surgical revenue growth and we now expect that to increase at a low 20% range for the full year, a little higher than we previously expected.
Patrick S. Miles: Revenue per surgery growth also contributes to surgical revenue growth and we continue to expect that to increase at a mid single digit percent rate for the full year.
Patrick S. Miles: I'd like to point out that prior to our October capital raise consensus was around $555 million for the full year 2020 for.
Patrick S. Miles: Only six months later guidance is now north of $600 million.
Patrick S. Miles: Which is $45 million higher than.
Patrick S. Miles: The number of prior to a race the new reps, we're attracting are highly tenured any strategic geographies.
Patrick S. Miles: The benefits of market disruption will not be reflected overnight. It is clear we are executing on the attack of the raise.
Patrick S. Miles: Now turning to profitability progress sales growth continues to fuel leverage across our business. We now expect full year 2024, adjusted EBITDA of approximately $23 million, which equates to 570 basis points of margin expansion that applies an approximate 27% drop through on the year over year growth in revenue dollars, an acceleration compared to the tune of two <unk>.
Patrick S. Miles: Drop through in 2023.
Patrick S. Miles: The degree of progress that we've already delivered with drivers of expected leverage contributing as plan give us great confidence in the updated profitability commitments that we shared as part of our long range plan update specifically from 2023 to 2027, we expect to deliver another 2000 basis points of operating leverage.
Patrick S. Miles: The majority of that or about 1000 basis points will be driven by contractual time based variable selling rate improvements.
Patrick S. Miles: Another 700 basis points fueled by SG&A infrastructure leverage.
Patrick S. Miles: And the remaining 300 basis points will come from R&D improvements as a percent of sales note that the R&D will continue to increase on an absolute dollar basis positioning us to consistently leaf spine innovation.
Patrick S. Miles: That continued operating progress will enable the business to be cash flow breakeven.
Patrick S. Miles: In 2025, the deliberate increase in profitability will support continued investments into the long term growth of our business, while empowering an inflection to solid cash flow generation.
Patrick S. Miles: Now I'll close with what sets <unk> apart in terms of the value creation opportunity ahead.
Patrick S. Miles: With a 40% revenue CAGR over the last five years, our growth stands out not just the magnitude and consistency, particularly as our revenue grows.
Patrick S. Miles: Our revenue base has grown.
Patrick S. Miles: We have clearly demonstrated execution and in the integrity of demand for a tech clinical distinction. We are the most differentiated most spine focused pure play on a big U S spine market that sizable consistent revenue growth has opened the door to our next leg of value creation, which is profitability. We have already demonstrated progress and have a clear line of sight to us.
Patrick S. Miles: Well for the future.
Patrick S. Miles: Fueling our long term financial growth story, our catalysts that make the apex story, especially compelling we're cultivating our lateral franchise with innovation to continue to earn share of the lateral market and convert more traditional surgeries to lateral surgery. Our industry is undergoing unprecedented disruption and we are capitalizing on it.
Patrick S. Miles: We are ready we are readying to launch enabling technology that uniquely integrates in spine workflows, including in deformity, where we are building a procedural solution around deals and we are laying a foundation in attractive international markets, where we can replicate the U S adoption curve.
Patrick S. Miles: <unk> truly a lot to be excited about and I look forward to sharing our progress with you with that I will turn the call back over to Pat.
Patrick S. Miles: Thanks, So much Todd I think with all of the goings on in the spine space the opportunity to improve spine surgery is significant and that will be our value driver when theres revision rates that are reflective of 10% to 15% in degenerative, 25% to 30% in adult deformity that durability of spine surgery is called into question.
Speaker Change: Nearly <unk> is in a unique position to lead and we look forward to doing so and with that what we'll do is turn the call over for questions.
Speaker Change: We will now open the floor up for questions in consideration of others. Please limit yourself to one question.
Speaker Change: The first question comes from the line of Joshua Jennings with Cowen Your line is open.
Joshua Thomas Jennings: Hi, good afternoon, Thanks for taking my questions and congratulations on a strong start to 2024.
Joshua Thomas Jennings: Pat I was hoping to ask about the opportunity and a formula that you guys have talked about this multiple times over the last six to 12 months.
Joshua Thomas Jennings: But one.
Joshua Thomas Jennings: Maybe just help us think about the tax.
Joshua Thomas Jennings: Sure.
Joshua Thomas Jennings: Formerly you may be hard to parse out.
Joshua Thomas Jennings: And then on top of that I was hoping to just ask about the evolution of CCAR.
Patrick S. Miles: Integrating motor group potentials into the monitoring platform.
Patrick S. Miles: And how important that is to when we proceed here I was just one one.
Patrick S. Miles: Performing procedures and <unk>.
Patrick S. Miles: Future share taking.
Patrick S. Miles: Yes.
Speaker Change: Yes, Josh Yeah, I think the opportunity to influence deformity is is very.
Speaker Change: Apparent and opportune it I think the most coveted tool in evaluating deformity is is an iOS image.
Speaker Change: I think bringing about.
Speaker Change: Predictive analytics to a field that completely lacks it.
Speaker Change: It is an opportunity to distinguish and so it's been.
Josh: So exciting to see.
Speaker Change: Automated measures the planning understanding reciprocal change in the levels bring.
Speaker Change: Bringing that into an operative experience and understanding that you can refine a.
Speaker Change: A patient specific implants, and then you can refine it in the operating based upon the information delivered and then just the ability to take that information and have the exact same age post operatively is almost predictive analytics by description and so.
Speaker Change: You think about the type of revision rates that you see in deformity and you think about what are the variables that you are trying to control and we think the great tool to control variables is the iOS image and ultimately how we utilize that in the surgery and so.
Speaker Change: We.
Speaker Change: We're a bit player in the Grand scheme of things in deformity, and we feel like this tool really brings us to the forefront of both adult and idiopathic.
Speaker Change: We have a long way to go from a design development perspective in terms of some of the some of the implant systems in that realm, we're doing a good job, but we have opportunities abound and and so I would tell you from a from a yield perspective, the most coveted tool in the business from an implant perspective I would.
Speaker Change: Say good to very good.
Speaker Change: He will be great we have the mechanical aptitude to be great.
Speaker Change: The Big Sleeper is is safer and I think that when you start to especially think about idiopathic deformity and you start to think about how disruptive nep's are today and the ability to do things like facilitation in a way that you don't need the voltage to ultimately test the motor elements of the of the cord and.
Speaker Change: To be able to assess that by not disrupting surgery, we feel like is it another significant benefit and so we feel like in both the adult and in the idiopathic realm. There are significant opportunities technologically to distinguish ourselves, which ultimately this is a this is a group that steeped in research in a group that doesn't make decisions to change.
Speaker Change: <unk> easily but our technology.
Speaker Change: Technology portfolio I believe we will provide that impetus.
Speaker Change: Great and just one follow up on another technology question just on the interoperable linemen and automated reconciliation tool can you just help us understand where you are in that development process. It looks like from the slides that there is a.
Speaker Change: We used a prototype or maybe that's already in play and I am just behind but how important is that as that technology, where are you guys in development. There it looks like you'd maybe be the only FTA not non <unk>.
Speaker Change: FDA cleared I guess piece of the <unk> site.
Speaker Change: That form of that May just be Adobe read by me on this slide.
Speaker Change: Thanks for thanks for helping us out.
Speaker Change: No I think I think it's the right catch.
Speaker Change: The inner operative reconciliation is not something that has historically been done and so we're in essence, making a market there and were early on in the experience with that we expect FDA clearance by the.
Speaker Change: By the end of Q2.
Speaker Change: But.
Speaker Change: But I will tell you this will be kind of a a long.
Speaker Change: Long effort in terms of creating.
Speaker Change: Utility and simplicity and.
Speaker Change: Seamlessness in the operating room. So it is our most immature element of the insight portfolio of goods, but one that we believe to be very very valuable over time. So.
Speaker Change: All of Florida, more updates, but youre catches exactly the right one.
Speaker Change: Alright, Thanks, a lot Pat.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of David Saxon with Needham Your line is open.
David Joshua Saxon: Great Good afternoon, Pat and Todd Thanks for taking my question.
David Joshua Saxon: I'd love to talk about.
David Joshua Saxon: Competitive hiring.
David Joshua Saxon: You've seen over the last few quarters, but specifically around what youre seeing in terms of leakage in territories that are covered by those competitive reps, our effective or has crossed Caribbean.
David Joshua Saxon: In regions that are impacted are covered by I guess non competes and then any future update to the hiring from I think it was 50 lost you disclosed in mid March and then just quickly for Todd any selling day impact in the quarter. Thanks, So much for taking my question.
Speaker Change: I'll start off and then I'll, let Todd.
Speaker Change: I hate to say cleanup.
Speaker Change: They'll provide decision.
Speaker Change: It's the way we work together.
Speaker Change: Hey.
Todd Koning: The the higher the hiring is going very very well it's entertaining.
Todd Koning: I get the opportunity to sit with our sales training class and I sat in there yesterday was 30 30 people.
Todd Koning: And women.
Todd Koning: And there is there is not a company that is not represented in the people who are coming for two <unk> and so one of the things that we committed to and it's almost like the international focus of Hey, We're gonna go narrow and deep.
Todd Koning: We're going to we're going to grow.
Todd Koning: Our sales force in a very deliberate.
Todd Koning: Liberate way our sales leader is a very disciplined guide, Dave Sponsel and I think he's done a superb job in terms of being methodical with regard to the geographies that we grow into and how many people within those geographies can we support them from a implant and instrument in a procedural perspective and so.
Todd Koning: There's a lot of things to bring to bear and so trying to be deliberate and precise in these efforts is hugely important but we continue to grow the sales force.
Todd Koning: There is there continues to be a lag in terms of their influence, but yeah. I would tell you a great progress is being made.
Todd Koning: The difference between I think the perspective from a from a banker investor standpoint is.
David Joshua Saxon: Sure.
David Joshua Saxon: I think there is an expectation that happens overnight.
David Joshua Saxon: And I think I tried to utilize the proxy of the K to Stryker as one that would suggest these things take time and.
David Joshua Saxon: As we look back on them, they're going to feel quick when you do the work through them.
David Joshua Saxon: They're not so quick and so anyway, we remain bullish it's a long tail and we are super excited about our prospects.
Speaker Change: And David I would think I would add to that.
Speaker Change: Clearly, we're seeing the impact of the hires that we've made.
Speaker Change: I referenced that specifically in my prepared comments.
Speaker Change: And so I think it is clear that those.
David Joshua Saxon: Those hires have been having an impact in the way that we expect.
Speaker Change: Everyone's different and everyone's in a unique situation. So there's variability from one geography to another but I would say nothing outside of the balance that we would expect and so I would say very much as planned the past point Theres a ton of interest. If you look at the people who are covenant and the building represents all the major players and so.
Speaker Change: Our belief is we're absolutely doing doing the deal as you laid it out and the beautiful thing here is that there is there's much more to come as we look forward to that and to your specific question on selling days were 64 selling days here in the quarter no impact year over year and I think it's about.
Speaker Change: Two days more than Q4.
Speaker Change: Great. Thanks, so much.
FICO Proud: Next question comes from the line of FICO proud with Wells Fargo.
FICO Proud: Your line is open.
FICO Proud: Hey, good afternoon, and thanks for taking the questions.
FICO Proud: Been bouncing around calls so I apologize if you've already been asked but can you maybe just talk about what you saw.
FICO Proud: What trends you saw during the quarter with respect to patient volumes and then I had a follow up please.
FICO Proud: Okay.
FICO Proud: Yeah.
Speaker Change: I guess.
Speaker Change: At least this is Pat.
Patrick S. Miles: I think what we saw as it is a pretty consistent flow.
Patrick S. Miles: Really all the way through the quarter.
Patrick S. Miles: There is yes, I think there is some vacations in the back end of.
Patrick S. Miles: March but.
Patrick S. Miles: Again, nothing that would create any day.
Patrick S. Miles: Discerned interests.
Patrick S. Miles: So.
Patrick S. Miles: It felt very very normal.
Patrick S. Miles: Alright, so felt good Vic in a way is as you can see we clearly think over achieved relative to our expectations and also the exit velocity there gives us a level of confidence to the race forward guidance as well, especially on surgical revenue. So I think to Pat's point you've.
Patrick S. Miles: Always got kind of Q1 vacations and timing with different types of holidays, but on the whole felt very good about the trends and where they're headed.
Speaker Change: Okay. Thank you for that color and then just as a follow up maybe just talk about the cadence of revenues and margins as we think about the rest of the year.
Speaker Change: Specifically in Q2 and Q3, thank you very much.
Speaker Change: Yeah.
Speaker Change: And I think as we kind of look at our overall.
Speaker Change: Really overall revenue growth of 25%, so $601 million I think ultimately.
Speaker Change: Our our view is that if you look at that being on average about 25%.
Speaker Change: Growth I think you'll see something similar to that in kind of Q2, and Q3, plus or minus I think when we look at the guide you saw us really kind of probably beat our expectation relative to iOS in the first quarter fundamentally think thats, a little bit of timing movement from from Q2.
Speaker Change: Two to Q1.
Patrick S. Miles: And then ultimately when you look at the profitability walk I think our profitability view is.
Patrick S. Miles: Adjusted EBITDA, we raised guidance by $1 million went from 22 million to $23 million that $23 million 570 basis points.
Patrick S. Miles: Margin expansion on the full year, we did 450 and I think as we've been talking about at the first half of the year will be.
Patrick S. Miles: Maybe 100 basis points of margin expansion less than the full year, so kind of $4 50 to $500. The second half would be probably 100 basis points north of that so kind of thing.
Patrick S. Miles: On total like 650.
Patrick S. Miles: $6 50 to 700 total so when you kind of oil that out I think in absolute adjusted EBITDA dollars, you're probably close to breakeven in the first half.
Patrick S. Miles: And the balance coming in the second half so I think on the whole that's how we see the timing of revenue and profitability walking through the year.
Patrick S. Miles: Okay.
Kevin Cronin: Next question comes from the line of keeping Cronin with Canaccord Genuity. Your line is open.
George: Hey, Tim It's George.
Kevin Cronin: George on for <unk>, Thanks for taking our questions kind of wanted to dig into more of your yield guidance.
George: Obviously, you raised your full year guidance, but just any more color you could give in terms of why you created reiterated use revenues when the quarter was look pretty strong for mine.
Speaker Change: Especially with the.
George: <unk> insight being launched maybe talk about how much of that is baked into your expectations.
George: If there is any more upside there and then ask one follow up.
George: Yeah.
George: Yes.
Speaker Change: I'll start off.
Speaker Change: The one thing Thats, an unadulterated truth in capital equipment is theres a lag.
Speaker Change: What we haven't done is pre sold the whole insight platform.
Speaker Change: And so we have a lot of work to do to go out and sell in sight. We are hugely bullish in terms of the long term prosperity, that's generated by iOS insight, but candidly few people know about it and so our opportunity to ultimately lay the foundation for our future large business I think is reflective of our of our.
Speaker Change: <unk> on the guidance front.
Speaker Change: Thanks, Pat and I think the other thing I would add to that just a couple of contractual things that $65 million is up 9% year over year growth.
Patrick S. Miles: If you recall last year, we had about $2 million of one time buys associated with a market exit and so when you strip that out kind of on a like for like basis, you get to a mid teens growth and so if you look at that $65 million in other way you look at over the last two or three years, we've grown that business, 20% year over.
Patrick S. Miles: A year and so underlying strength of the U S business I think what we've delivered is quite strong I will say when you look at our guide being 65 going into the year and then the performance. We had this year keeping at 65% really I would tell you that it reflects a level of conservativism associated with the capital equipment.
Patrick S. Miles: And probably just being a little bit conservative on that point and from your question relative to how those yields insight launch impact our view I think.
Patrick S. Miles: Point, you back to past comments, which is I think that will be reflected ultimately in interest in orders and if you think about the capital selling cycle will be in a 12 month cycle.
Patrick S. Miles: There is some time.
Speaker Change: I think once we really start to see yields insight influencing.
Speaker Change: The revenue.
Speaker Change: Certainly I think it will start to see some some orders matriculate come through here over time, but.
Speaker Change: That's really how we viewed 2024 U S revenue setup.
Speaker Change: Yeah, that's really great.
Speaker Change: Color and then just one quick one from me just early days in terms of Valens, obviously, but Keith.
Speaker Change: He is also a little bit about appetite among your existing iOS users in really any insights in how many of your existing <unk> users are currently using robots from competitors. Thanks.
Speaker Change: Yeah, that's a tough question.
Speaker Change: Well I think yeah, I think our our customer basis is pretty reflective of just kind of general audiences.
Speaker Change: Of robotic users and.
Speaker Change: Hi.
Speaker Change: I think we've always had a little bit of a disparate view with regard to the value of robotics as they currently are reflected and so the bullishness of our valent strategy is really in the integration of the technology into lateral surgery, and just continuing to elevate the precision associated with a technique and we think.
Speaker Change: There's a ton of opportunities they are very apparent to us that design and development stuff is going as planned and we.
Speaker Change: We'll.
Speaker Change: Sure. Some some information in terms of just the utility of the <unk>.
Speaker Change: Nab robotics stuff just for sake of interest.
Speaker Change: As we get through this year.
Speaker Change: But next year I think.
Speaker Change: You'll begin to see the influence clinically, which again will then there'll be a bit of a drag.
Speaker Change: Numerically, but anyway, it's a nice tailwind is yet to be reflected.
Speaker Change: Yeah.
Speaker Change: Next question comes from the line of <unk>, Li with H C. Wainwright Your line is open.
Li: Hey, good afternoon, guys and thanks for taking my questions just.
Li: Quick question on the international market, so from the slides it looks like.
Li: Full of the CDP in Japan isn't expected until 2026. So I was wondering what steps remains to be done before you can launch the product there and also do you plan on additional expansions internationally before that.
Li: Yeah.
Speaker Change: I appreciate the question.
Speaker Change: The dynamic is is that the Japanese market is a very careful market and.
Speaker Change: And so the the one.
Speaker Change: Historical dynamic has been that.
Speaker Change: The J SSR, which is the Japanese spine society opines on on the regulatory clearance of of companies in the market space.
Li: We were over the Jason our recently it had a very productive meeting and very exciting.
Li: They're going to they're going to initially enable us to go in with some more conventional items you saw that our invictus portfolio got cleared and it.
Li: We will start to go in with that.
Li: We will start with the with lateral surgery in that marketplace and our LTP.
Li: B, it's really the first thing.
Li: Garners experienced in Japan, and then what they'll do is will slowly go in with PTP. So we're just trying to be thoughtful with regard to what our expectations are from a contribution standpoint in that market. Realizing that it's a very conservative market and things will go slow what gives US great excitement is if you look at the again, we consider Australia such a <unk>.
Li: Proxy, Australia, New Zealand and you look at the 400 PTP is being done in Australia. It just speaks to the predictability and reproducibility of the technique that gets introduced to a new market space and just our ability to ultimately garner like you don't get 400, if it's not predictable and reproducible and so.
Li: Our enthusiasm to get into Japan, which is a much larger footprint and again a very consistent.
Li: A group of people as as as the Americans are in terms of just the procedural bend in the interest in applying procedures to pathologies and not being a widget market. So anyway, probably more than you cared for but but.
Li: That's our enthusiasm that's the drag that's why we said 2026 and PTP is it just can be a methodical walk.
Speaker Change: That's very helpful. Thanks, guys.
Speaker Change: Yes for sure.
Speaker Change: Yeah.
Speaker Change: Next question comes from the line of young Lee with Jefferies. Your line is open.
Sean Lee: Alright, great. Thanks for taking our question.
Sean Lee: Sorry been hopping around on calls.
Sean Lee: But I guess the question is on the.
Sean Lee: The top 10 U S market chart.
Sean Lee: Very strong growth in two years from 2% to 6%.
Speaker Change: Wanted to hear a little bit about some of the top reasons for that growth and penetration.
Speaker Change: Is it from competitive rep hiring organic growth.
Speaker Change: Maybe using the yields to open accounts PTP.
Speaker Change: Just wanted to hear a little bit of the reasons for that.
Speaker Change: <unk>.
Speaker Change: What are some of the other key strategic U S markets you're focused on.
Speaker Change: For $24 25.
Speaker Change: Yes.
Speaker Change: I'll provide some opinions on the markets, where I feel like we're making great progress I'll, probably refrain from describing what markets, we expect to be next problems.
Speaker Change: Probably the other call that you were on the <unk>.
Speaker Change: Listening in.
Speaker Change: The it doesn't matter.
Speaker Change: The.
Speaker Change: Probably at least as I look at the very very big market as I look at like.
Speaker Change: Chicago more organic.
Speaker Change: Type of a growth profile some clear additions of people that have made significant differences in our run rate in say a Chicago.
Speaker Change: New York, and New Jersey had been a competitive hiring scenario that is been outstanding that was a big block of guys that came over in whole in the fourth quarter of last year, they're starting to make progress and theyre going to be.
Speaker Change: They're going to be well suited to make a great run for a long period of time in that in that market and so.
Speaker Change: I would say that.
Speaker Change: The impact in the most immediate are apparent.
Speaker Change: Growth spaces of say in New York and Chicago two of the biggies.
Speaker Change: Have been.
Speaker Change: I would say in.
Speaker Change: Inorganic in New York more organic in Chicago, I would say organic in Los Angeles, starting to see Los Angeles start to start to demonstrate growth very organic and.
Speaker Change: In that Houston.
Speaker Change: In Houston, the PTP capital of the World.
Speaker Change: No I think we're just seeing that those people that have experience in this space, especially those that have experience in lateral has done exceedingly well Phoenix is another market, where we have really an exceptional team and so where we have people who have bought into the thesis of the company and have engaged deeply.
Speaker Change: Into what we're trying to build we are making significant progress and I think it's reflected in the in the top line growth number.
Speaker Change: I also think it's reflective in kind of the statistics underneath where we continue to see surge in growth, but consistent increased surgeon adoption and I think that reflects the broadening adoption.
Speaker Change: Our core lateral franchise PTP to think about how you can apply that to more and more complex anthologies overtime as you adopt that and then you think about the halo effect and ultimately the impact that that has on an.
Speaker Change: Our ability to just not only.
Speaker Change: Ive deeper.
Speaker Change: In a geographical area by adding more surgeons, but to dive deeper within the surgeon's practice.
Speaker Change: Yes.
Speaker Change: One last point is we have a PTP meeting coming up.
Speaker Change: With more than 50 surgeons in attendance is oversubscribed and it just it makes me think back about several years ago. When we started to talk about this in completely get dismissed by the rest of the marketplace only to be right and it's <unk>.
Speaker Change: I would tell you that what makes this thing fund is a group of people that have been around spine surgery for years and ultimately are applying their experiences in ways that ultimately create progress. So we're living in a good time in this business and just can't be more excited about the opportunities forward.
Speaker Change: Alright, Thank you very much I appreciate the details.
Speaker Change: Well I would just say thanks for your interest in <unk>.
Speaker Change: We are just getting started and it's just a tagline. So anyway. Thanks, so much for your interest.
Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Speaker Change: Okay.
Speaker Change: Gentlemen, This concludes today's conference call you may now disconnect.
Speaker Change: Okay.