Q2 2024 Alphatec Holdings Inc Earnings Call
Good afternoon everyone and welcome to the webcast of ATEC's second quarter financial results.
Unknown Executive: Atex Second Quarter Financial Results. We would like to remind everyone that participants on the call 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 SEC.
Speaker Change: We would like to remind everyone that participants on the call 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 SEC.
Unknown Executive: During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of these 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 to investors. Leading today's call will be ATEX Chairman and CEO Pat Miles and CFO Todd Koning. Now, I will turn the call over to Pat Miles. Thanks much, Danica.
Speaker Change: During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial tables included in today's press release.
Speaker Change: which identify and quantify all excluded items and provide management's view of why this information is useful to investors.
Speaker Change: Leading today's call will be ATEX Chairman and CEO Pat Miles and CFO Todd Koning. Now I will turn the call over to Pat Miles.
Patrick S. Miles: And thanks, everybody, for your interest in engaging in the call. So I will jump right into the Q2 2024 highlights. And I would say it's another deliberate step in fulfilling the commitment to profitable long-term sales growth. And so we finished the quarter at a total of $146 million in total revenue.
Patrick S. Miles: Thanks much Danica and thanks everybody for your interest in engaging in the call.
Speaker Change: So, I will jump right into the Q2 2024 highlights.
Speaker Change: And I would say it's another deliberate step in fulfilling the commitment to profitable long-term sales growth. And so, finish the quarter at a total of $146 million in total revenue.
Patrick S. Miles: The total revenue percent growth was 25 percent, 27 percent surgical revenue growth, which I expect to be best in class, 20 percent growth in new users, which I would say speaks to the expansion metrics, and 15 percent surgical volume growth. I think that's a metric that reflects kind of the nonlinear ramp as we continue to upgrade our sales force. One that I love is the 10 percent growth in average surgical revenue per case. That speaks to the convoyed elements of our procedural strategy and the buy-in to that, which is really good. We inflected to profitability with an adjusted EBITDA of $5.6 million.
Speaker Change: The total revenue percent growth was 25%.
Speaker Change: 27% surgical revenue growth, which I expect to be best-in-class, 20% growth in new users,
Speaker Change: Which I would say is speaks to the expansion metrics 15% surgical volume growth I think that's a metric that reflects kind of the nonlinear ramp as we continue to upgrade our sales force
Speaker Change: One that I love is the 10% growth in average surgical revenue per case. That speaks to the convoyed elements of our procedural strategy and the buy-in to that which is really good.
Speaker Change: We inflected to profitability with an adjusted EBITDA of $5.6 million.
Patrick S. Miles: We had 244 surgeon training engagements fueled by our footprint expansion, so there's a lot going on there. I think the $50 million invested is a confidence proxy for our route forward, and so expanding just the footprint to support growth. And then last but not least, and I think the thing that I'm going to spend a lot of time on during this call really, is the EOS Insight launch on time. And I will explain the relevance of that, but it reflects the work of really hundreds of people over a multi-year period. And so it was audacious, and I'm exceedingly proud of it.
Speaker Change: We had 244 surgeon training engagements fueled by our footprint expansion so there's a lot going on there. I think the 50 million dollars invested is the
Speaker Change: is a confidence proxy for our route forward, and so expanding just the footprint to support growth.
Speaker Change: And then last but not least, and I think the thing that I'm going to spend a bunch of time on during this call really, is the EOS Insight launch on time.
Speaker Change: And I will explain the relevance of that, but it reflects the work of really hundreds of people over a multi-year period. And so it was audacious, and I'm exceedingly proud of it. And when we acquired EOS, our vision was to translate.
Patrick S. Miles: And when we acquired EOS, our vision was to translate the most coveted image in spine into an informatic, and I would tell you, we've done it. So if you look back or think back, we came to A-TECH to create a spine juggernaut. And we wanted to do it by creating value by advancing the field of spine. And we are committed to a deliberate, spine-focused, long walk. And I think that the revenue reflection of this strategy is undeniable.
Speaker Change: The most coveted image in Spine into an informatic. And I would tell you, we've done it.
Speaker Change: So, if you look back or think back, we came to AITEC to create a spine juggernaut.
Speaker Change: and we wanted to do it creating value by advancing the field of spine and we are committed to a deliberate
Speaker Change: Spine focus, long walk.
Speaker Change: I think that the revenue reflection of this strategy, I think, is undeniable. We have created clinical distinction, so we are distinguishing aid tech technologically through really two really core means.
Patrick S. Miles: We have created clinical distinction. So we are distinguishing aid tech technologically through really two really core means. We've architected procedures, which is reflected in the assembly of products, and then concentrated on what informatics creates predictability in spine. And I think that it's highly relevant for this time of year and this call.
Speaker Change: We've architected procedures, which is reflected in the assembly of products.
Speaker Change: and then concentrated on what informatic creates predictability in spine. And I think that it's highly relevant for this time of year and this call.
Patrick S. Miles: The second thing that we've been able to do is compel adoption, and that just means increasing surgeon users by improving surgery. So if the clinical distinction is what we know it to be, the likelihood that somebody will be inspired to use our stuff is high. And clearly, what else is required is an elevated, expanded distribution network.
Speaker Change: The second thing that we've been able to do is compel adoption, and that just means increasing surgeon users by improving surgery. So if the clinical distinction is what we know it to be, the likelihood for somebody to be inspired to use our stuff is high.
Speaker Change: and and clearly what else is required is is a is an elevated expanded distribution network and so doing our best to attract talent with distinction-driven surge in demand and so
Patrick S. Miles: And so we do our best to attract talent with distinction-driven surgeon demand. And so I would tell you that those are foundational to our success, and we love to revisit them because it's what's driving the company. So when we talk about procedural architecture, I will tell you that we are steeped in a history of value creation via informatic integration.
Speaker Change: I would tell you that those are foundational to our success and we love to revisit them because it's what's driving the company.
Speaker Change: So, when we talk about procedural architecture, I will tell you that we are steeped in a history of value creation via informatic integration.
Patrick S. Miles: What that means is, is there information where we could mitigate clinical variables to improve surgery? And when you start to think about the ascension and the prowess that's been created in lateral, it is our growth driver. What's done is a key piece of information that enables surgeons to really know things that they wouldn't have known otherwise. And so when you think about lateral surgery, and you go from skin to spine, the most relevant anatomy of concern is neurological.
Speaker Change: What that means is, is there information where we can mitigate clinical variables to improve surgery?
Speaker Change: And when you start to think about the ascension and the prowess that's been created in lateral, it is our growth driver.
Speaker Change: What's done that is a key piece of information that enables surgeons to to really know things that they wouldn't have known otherwise and so when you think about lateral surgery and you go from skin to spine the most relevant anatomy of concern is neurologic
Patrick S. Miles: And so to have a tool to be able to say, hey, I know where the nerve is, and I know what its health is, is really kind of foundational information that drives surgeon decision making. I hope that what this does is really kind of serves as an example or a proxy for how informatics influences the predictability of spine surgery because from this, what we've done is, I would tell you, we've learned. And what we've learned is that really what precludes predictability oftentimes is information.
Speaker Change: And so to have a tool to be able to say, hey, I know where the nerve is, and I know what the health of the nerve is, is really kind of foundational information that drives surgeon decision making.
Speaker Change: I hope that what this does is really kind of serves as an example or a proxy for how informatics influences the predictability of spine surgery because from this what we've done is is I would tell you that we've we've learned
Speaker Change: And what we've learned is...
Speaker Change: is that, is that really what precludes predictability often times is...
Patrick S. Miles: And so measurable information that mitigates variables, it is the why behind our investment thesis into the most comprehensive, integrated end to end automated information ecosystem in spine. Most importantly, it'll drive improved spine care, which is yearned for by patients. Spine is hugely complex, and when you think about it as compared to other orthopedic surgeries, it is less durable.
Speaker Change: is information. And so measurable information that mitigates variables. It is the why behind our investment thesis into the most comprehensive, integrated, end-to-end automated information ecosystem in SPINE.
Speaker Change: Most importantly, it'll drive improved spine care. Spine's yearning for improvement. Spine is hugely complex and when you think about it as compared to other orthopedic surgery, it is less durable.
Patrick S. Miles: And the revision rates in both short and long segment surgery are unacceptably high. And if our job as a spine provider is not to make that better, I don't know what our responsibility is. There's a bad joke in spine, and it talks about there being two kinds of spine surgeons. There are the ones that create deformity and the ones that fix it. I got to tell you, we want to be in the latter category.
Speaker Change: And the revision rates in both short and long segment surgery are unacceptably high. And if our job as a spine provider is not to make that better, I don't know what our responsibility is.
Speaker Change: There's a bad joke in Spine and it talks about there's two kinds of surgeons. There's the ones that create deformity and the ones that fix them.
Patrick S. Miles: And the last thing a prospective patient needs in contemplating spine surgical intervention is a double-digit likelihood that there's going to be future surgery. And so, you know, our ability to delve into how we minimize that potential is a value creator. We have demonstrated how using information to mitigate variables furthers predictability. We have done this with Eos Insights through focus on pre, intra, and the post-op experience. This is what we mean by end-to-end.
Speaker Change: I've got to tell you, we want to be in the latter category.
Speaker Change: And the last thing a prospective patient needs in contemplating spine surgical intervention is a double-digit likelihood that there's going to be future surgery. And so our ability to delve into how we minimize that potential is a value creator.
Speaker Change: We have demonstrated how using information to mitigate variables furthers predictability. We have done this with Eos Insights through focus on pre, intra, and the post-op experience.
Patrick S. Miles: Starting at the pre-op and ending at the post-op, Eos Insight is just the beginning of a fully integrated tool that improves spine care. Let's start with an explanation of the really preoperative experience. And so the reason most surgeons do not plan surgery is that it is onerous. It often takes a very long time, and it's imprecise. You're dealing with non-standard imaging modalities, where magnification and other challenges undermine accuracy.
Speaker Change: This is what we mean by end-to-end. It starts at the pre-op and ends at the post-op. Eos Insight is just the beginning of a fully integrated tool that improves spine care.
Speaker Change: Let's start with an explanation around really the preoperative experience. So, the reason most surgeons do not plan surgery is that it is onerous.
Speaker Change: It often takes a very long time and it's imprecise. You're dealing with non-standard imaging modalities where magnification and other challenges undermine accuracy.
Patrick S. Miles: In short, it is a lot of work for little precision and objective value. So it's just not done often. The beauty of EOS Insight is that it provides AI-automated alignment measures that inform the surgical plan. It is a computer generated assessment that precisely measures a patient's spinal alignment parameters. If alignment is the greatest correlative to durability or a successful long-term outcome, we believe this to be a requirement of surgery. So EOS Insight automates this task with precise computer-generated alignment measures that inform a 3D model and, subsequently, a surgical plan. The surgical plan illustrates the optimal construct that maximizes the highest likelihood for plan achievement. Then the 3D plan contemplates what implants are most apt to achieve a normative, age-related restoration of spine alignment.
Speaker Change: In short, it is a lot of work for little precision and objective value. So,
Speaker Change: It's just not done often. The beauty of EO's Insight is it provides AI-automated alignment measures that inform the surgical plan. It is a computer-generated assessment that precisely measures a patient's spinal alignment parameters.
Speaker Change: If alignment is the greatest correlative to durability or a successful long-term outcome, we believe this to be a requirement of surgery.
Speaker Change: So EOS Insight automates this task with precise computer-generated alignment measures that inform a 3D model and subsequently a surgical plan.
Speaker Change: The surgical plan illustrates the optimal contract that maximizes the highest likelihood for plant achievement. Then the 3D plan contemplates what implants are most apt to achieve a normative, age-related restoration of spine alignment.
Patrick S. Miles: Once this is determined, as expected, EOS Insight provides for the option of a custom implant. And so the preoperative sophistication is efficient, it's expedient, and it's automated. And so the work required is little to none.
Speaker Change: Once this is determined, as expected, Eos Insight provides for the option of a custom implant, and so the preoperative sophistication is efficient, it's expedient, it's automated, and so the work required is
Patrick S. Miles: And so I think that that's an exceedingly attractive part of the preoperative effort. So when you start to move it to the interoperative phase, and once the plan is complete and imported into the interoperative experience, then what you start to do is you say, If the plan calls for lateral surgery, our ecosystem will have valence, which is the navigation robotic system assembled to safob, which enables you to look where the nerve is and the health of the nerve. So it assembles those pieces of technology. And really, that's the start of a kind of integrated tools that reflect innovation. So, the EOS operative plan is automatically loaded into our EOS Interoperative Alignment System, IOA.
Speaker Change: Little to none. And so I think that that's an exceedingly attractive part of the preoperative effort.
Patrick S. Miles: And so, what that system does is it takes intraoperative images and measures them compared to the preoperative surgical plan. It enables information like reciprocal change. Do I understand how I've effectuated the spine?
Speaker Change: So, when you start to move it to the interoperative phase, and once the plan is complete and imported into the interoperative experience, then what you start to do is you say,
Speaker Change: If the plan calls for lateral surgery, our ecosystem will have Valence, which is the navigation robotic system, assembled to Safob, which enables you to look where the nerve is and the health of the nerve. So it assembles those pieces of technology.
Speaker Change: And really, that's the start of kind of integrated tools that reflect innovation.
Speaker Change: So the EOS operative plan is automatically loaded into our EOS Interoperative Alignment System, IOA. And so what that system does is it takes intraoperative images and measures them compared to the preoperative surgical plan.
Speaker Change: It enables information like reciprocal change. Do I understand how I've effectuated this spine? And it enables them to achieve the operative experience prior to leaving the operating room.
Patrick S. Miles: And it enables them to achieve the operative experience prior to leaving the operating room. Thus, these informatic tools ultimately combine best-in-class informatics with best-in-class procedural-specific tools. And so, it is no coincidence that the most coveted understanding of the lateral requirements is here at ATAC. And I would tell you, they are integrated with an informatics system and a procedural-specific set of tools that ultimately create predictability. A driver of our growth has included an increase in average selling price.
Speaker Change: So, these...
Speaker Change: These informatic tools ultimately combine best-in-class informatics with best-in-class procedural-specific tools.
Speaker Change: And so, it is no coincidence that the most coveted understanding of the lateral requirements are here at ATEC. And I would tell you, they are integrated with a informatics system and a procedural specific set of tools that ultimately creates predictability.
Speaker Change: A driver of our growth has included an increase in average selling price.
Patrick S. Miles: And when you look at the average selling price, what you do is you say, gosh, did we assemble tools to ultimately reflect on the requirements of surgery, so an assemble procedure? The other reflection is surgical complexity.
Speaker Change: And when you look at average selling price, what you do is you say, gosh,
Speaker Change: Did we assemble tools to ultimately reflect on the requirements of surgery, so an assembled procedure?
Speaker Change: The other reflection is in surgical...
Patrick S. Miles: And so we believe that our ecosystem will be a key driver to continue to drive surgeon confidence, offering more and more complex surgery, which really can lead you to the realm of deformity. And so the ecosystem that we've created will be highly relevant in deformity surgery. Not only in the navigation robotics piece, but we've done what's called facilitate the MEPs for spinal cord monitoring. If realignment is a key driver of deformity surgery, interoperative reconciliation to assert surgical plan fulfillment is a must. Deformity surgery is intended to have a restorative impact.
Speaker Change: Surgical Complexity. And so we believe that our ecosystem will be a key driver to continue to drive surgeon confidence, availing more and more complex surgery.
Speaker Change: which really can lead you to the realm of deformity. And so the ecosystem that we've created will be highly relevant in deformity surgery.
Speaker Change: Not only in the navigation robotics piece and what we've done is added what's called facilitated MEPs for spinal cord monitoring.
Speaker Change: If realignment is a key driver of deformity surgery, interoperative reconciliation to assert surgical plan fulfillment is a must. Deformity surgery is intended to provide a restorative impact. Our influence in both adult and AIS surgery, in essence adolescents,
Patrick S. Miles: Our influence in both adult and AIS surgery, in essence, adolescent, is in the earliest of faith; our work on patient-specific implants, positioners, derotation tools, and the like is really just getting going. So in my mind, a ton of tailwind for the work that we're doing. I would say that another extremely relevant reflection of just the automation of EOS Insight is the data collection element. Collecting data from an automated source requires no special activity.
Speaker Change: As in the earliest of faith, our work on patient-specific implants, positioners, derotation tools, and the like is really just getting going. So in my mind, a ton of tailwind in the work that we're doing.
Speaker Change: I would say that another extremely relevant reflection of just the automation of EOS Insight is the data collection element.
Patrick S. Miles: So again, the work requirement is very limited. But the beauty is that it provides insights that improve future surgery. Some call that predictive analytics. But in simple speak, it is a way to ultimately improve future surgeries. Mitigating variables through patient and practice insights driven from automated data collection makes for more informed surgery. We believe the data collection aspect of the EOS Insight tool to be a significant driver of future value. So I think so often people are introduced to things and are introduced to them more theoretically than practically.
Speaker Change: Collecting data from an automated source requires no special activity. So again, the work requirement is very limited.
Speaker Change: The beauty is that it provides insights that future...
Speaker Change: that improve future surgery. Some call that predictive analytics, but in simple speak, it is a way to ultimately improve future surgery. Mitigating variables through patient and practice insights driven from automated data collection at the very least makes for more informed surgery.
Speaker Change: We believe the data collection aspect of the EOS Insight Tool to be a significant driver of future value.
Speaker Change: So...
Speaker Change: I think so often people are introduced to things and they're introduced to them more theoretically than practically. And what we want to do is really kind of show you the plan in action.
Patrick S. Miles: And what we want to do is really kind of show you the plan in action, and we would love a quick shout out to Dr. Craig McMains and Dr. Dave Schwartz at OrthoIndy. They ultimately completed the first initial case of EOS Insight, and the first patient was scanned on the EOS Edge, so you see the automated alignment measures. As I said, scanned on the EOS Edge, generated an AI automated alignment report, which was opened in the portal. The automated alignment then informed the 3D surgical plan.
Speaker Change: Would love a quick shout out to Dr. Craig McMains and Dr. Dave Schwartz at OrthoIndy.
Speaker Change: They ultimately completed the first initial case of EOS InSight.
Speaker Change: And the first patient was scanned in the EOS Edge. So you see the automated alignment measures. So as I said, scanned in the EOS Edge, generated an AI automated alignment report, which is opened in the portal.
Patrick S. Miles: The plan provides for normative values for the specific patient and generates a patient-specific custom surgical plan. That plan then informs the patient-specific rod. And so, you can see down at the bottom is a patient-specific pre-bent rod.
Speaker Change: The automated alignment then informed the 3D surgical plan, the plan provides for normative values for the specific patient and generates a patient-specific custom surgical plan.
Speaker Change: That plan then informs the patient-specific rod, so you can see down at the bottom is a patient-specific pre-bent rod.
Patrick S. Miles: All of this is done preoperatively in a highly automated, efficient manner. So the expedience of this is very strong. At that point, what we do is take the plan and we port it into the operating room. By importing it, we import it into a tool that enables an interoperative reconciliation against the preoperative planning measures.
Speaker Change: All of this is done preoperatively in a highly automated, efficient manner, so the expedience of this is very strong.
Speaker Change: At that point, what we do is we take the plan and we port it into the operating room.
Speaker Change: By importing it, we import it to the tool that enables an interoperative reconciliation against the preoperative planning measures.
Patrick S. Miles: So all of this is a very expedient exercise that takes the pre-op, integrates into the inter-op, and enables the surgeon to understand exactly where they are in real time in the operating room. And then, at the post-operative phase, there's an opportunity to compare the objective data from the pre-operative alignment to the plan to the result. This is the result of a company that is committed to moving spine surgery forward. Because of the complexity of this effort and the on-time launch, we are extraordinarily proud.
Speaker Change: So all of this is a very expedient exercise that takes the pre-op, integrates into the inter-op, and enables the surgeon to understand exactly where they are in real time in the operating room.
Speaker Change: And then the beauty is, is the post-operative phase, there's an opportunity to compare the objective data from the preoperative alignment to the plan to the result. This is the result of a company that is committed to moving spine surgery forward. The complexity of this effort and the on-time launch is something for which.
Patrick S. Miles: Creating clinical distinction or the fulfillment of our clinical vision is really coming to fruition right before our eyes. And so now the effort becomes compelling more converts. And so that's happening. As you can see, it's happening.
Speaker Change: We are extraordinarily proud. Creating clinical distinction or the fulfillment of our clinical vision is really coming to fruition right before our eyes.
Speaker Change: And so now the effort becomes in compelling more converts.
Patrick S. Miles: We are compelling surgeon adoption in Q2. We had record-breaking surgeon training that reflects adoption where we're investing in long-term momentum building. So we had 244 surgeons, and as stated, 20% growth in surgeon users. So I think clearly that we're making progress as it relates to compelling surgeon adoption.
Speaker Change: And so that's happening. As you can see, it's happening. We are compelling surgeon adoption in Q2. We had a record-breaking surgeon training that reflects adoption where we are investing in long-term momentum building.
Speaker Change: So we had 244 surgeons, and as stated, 20% growth in surgeon users. So I think clearly that we're making progress as it relates to compelling surgeon adoption.
Speaker Change: Something went wrong. Please try again.
Patrick S. Miles: I think the other element that I think is highly important is, are we putting the right people around the company from a field perspective? And so recruitment continues and expands our ability to meet the surge in demand. Market disruption continues to be our friend and is industry-wide. We will continue to capitalize on that market disruption. We have a strong funnel of experienced talent to expand and upgrade our sales footprint. And we believe, again, that the disruption is a multi-year tailwind. As you'd expect, however, it's a non-linear walk.
Speaker Change: That was my friend, Siri.
Speaker Change: I think the other element that I think is is highly important is are we putting the right people around the company from a field perspective and so recruitment continues and expands our ability to meet surge in demand. Market disruption continues to be our friend and is industry-wide. We will continue to capitalize on that market disruption.
Speaker Change: We have a strong funnel of experienced talent to expand and upgrade our sales footprint. And we believe, again, that the disruption is a multi-year tailwind.
Speaker Change: As you'd expect, however, it's a nonlinear walk. I think, you know, another interesting thing is if you look at the demographics of the recruitment class of our year-to-date recruiting efforts in the class of 2024, there's a lot of activity going on.
Patrick S. Miles: I think, you know, another interesting thing is if you look at the demographics of the recruitment class of our year-to-date recruiting efforts in the class of 2024, there's a lot of activity going on. What gives people confidence, however, is the 23% growth in established territories. It's one of those things where many of us who have been here for a long period of time have started from nothing and created, again, a monstrosity of growth. And I think that it gives people a lot of confidence when they join the family that they're able to do the same.
Speaker Change: What provides people confidence, however, is the 23% growth in established territories.
Speaker Change: It's one of those things where it's like many of us who have been here for a long period of time have started from nothing and created a, again, a monstrosity of growth. And I think that it gives people a lot of confidence when they join the family that they're able to do the same.
Patrick S. Miles: So, as you would expect, we are executing well against our long-term commitments and are excited about how we'll continue the walk toward our 2027 commitments of a billion dollars in revenue. In 2027, we also expect an adjusted EBITDA of $180 million, an adjusted EBITDA margin of 18%, and free cash flow of $65 million. And so, I think that we have a heck of a lot of momentum. There are so many things going on clinically.
Speaker Change: So, as you would expect, we are executing well against our long-term commitments and are excited about how we'll continue the walk toward our 2027 commitments of a billion dollars in revenue.
Speaker Change: In 2027, an adjusted EBITDA of $180 million.
Speaker Change: a adjusted EBITDA margin of 18% and free cash flow of $65 million. And so I think that we have a heck of a lot of momentum. There are so many things going on clinically. That is the cornerstone of who we are as an organization. And I'm thrilled with where we are at this point in 2024.
Patrick S. Miles: That is the cornerstone of who we are as an organization, and I'm thrilled with where we are at this point in 2024. So with that, I'll turn it over to you. Well, thank you, Pat, and good afternoon, everyone.
Speaker Change: more.
Todd Koning: We appreciate you joining us on the call. I'll begin with revenue. Second quarter total revenue was $145.6 million, reflecting 25% growth compared to the prior year and up 5% sequentially. The $145.6 million in revenue is comprised of $130 million in surgical revenue and $115.5 million of EOS revenue. Second quarter surgical revenue of $130 million increased 27% year over year against a strong comparable of 41% growth in the prior year period.
Speaker Change: Well, thank you, Pat, and good afternoon, everyone. We appreciate you joining us on the call today.
Speaker Change: I'll begin with revenue. Second quarter total revenue was $145.6 million, reflecting 25% growth compared to the prior year, and up 5% sequentially.
Speaker Change: The $145.6 million in revenue is comprised of $130 million in surgical revenue and $115.5 million of EOS revenue.
Speaker Change: Second quarter surgical revenue of $130 million increased 27% year-over-year against a strong comparable of 41% growth in the prior year period. Surgical revenue growth was robust across the entire portfolio, particularly in lateral and expandable implants.
Todd Koning: Surgical revenue growth was robust across the entire portfolio, particularly in lateral and expandable implants. We drove procedural volume growth of 15% and revenue per procedure growth of 10% compared to the prior year. Both metrics have shifted slightly relative to recent trends due to the meaningful Salesforce upgrades and additions that we are implementing. We are upgrading some existing territories with new sales agencies to more strategically reflect the A-TECH brand and align with the surgeons who are compelled by our procedural thesis.
Speaker Change: We drew a procedural volume growth of 15% and revenue per procedure growth of 10% compared to the prior year. Both metrics have shifted slightly relative to recent trends due to the meaningful Salesforce upgrades and additions that we are executing.
Speaker Change: We are upgrading some existing territories with new sales agencies to more strategically reflect the A-TECH brand and align with the surgeons who are compelled by our procedural thesis.
Todd Koning: That generally increases average revenue per procedure in the territory, yet as new coverage ramps up, volumes related to the incumbent coverage wind down. As a result, there may be quarter to quarter lumpiness in the underlying dynamics of revenue growth as the upgraded territories ramp up. And specific to the second quarter, case volume growth was not as strong, while average revenue per procedure growth exceeded recently. Adjusting for this dynamic in the quarter, volume growth would have been about 300 basis points higher at 18%.
Speaker Change: That generally increases average revenue per procedure in the territory. Yet, as new coverage ramps up, volumes related to the incumbent coverage wind down.
Speaker Change: As a result, there may be quarter-to-quarter lumpiness in the underlying dynamics of revenue growth as the upgraded territories ramp. And specific to the second quarter, case volume growth was not as strong, while average revenue per procedure growth exceeded recent trends.
Speaker Change: Adjusting for this dynamic in the quarter, volume growth would have been about 300 basis points higher at 18%.
Todd Koning: Our long-term expectation is that the upgraded agencies will grow the territories, contributing over time to sustainable improvements in territory revenue. The 20% growth in Q2 surge in adoption corresponds well with this. Surgical revenue growth in the second quarter was also impacted by an additional, more transient dynamic. We outgrew supply of one of our biologics offerings and one of our expandables. We have addressed both constraints and now have full supply available. EOS revenue in the second quarter was $15.5 million, up 6% compared to last year. Next, I'll turn to results for the remainder of the P&A. Second quarter non-GAAP gross margin was 71.2%, up 190 basis points compared to the prior year.
Speaker Change: Our long-term expectation is that the upgraded agencies will grow the territories, contributing over time to sustainable improvements in territory revenue.
Speaker Change: The 20% growth in Q2 surgeon adoption corresponds well with this.
Speaker Change: Surgical revenue growth in the second quarter was also impacted by an additional more transient dynamic. We outgrew supply of one of our biologics offerings and one of our expandable implants. We have addressed both constraints and now have full supply available.
Speaker Change: EOS revenue in the second quarter was $15.5 million, up 6% compared to last year.
Speaker Change: Next, I'll turn to results for the remainder of the P&L.
Speaker Change: Second quarter non-GAAP gross margin was 71.2%.
Speaker Change: Up 190 basis points compared to the prior year. The year-over-year increase continues to be driven by improved EOS gross margin and volume-driven leverage of our Memphis Distribution Facility.
Todd Koning: The year-over-year increase continues to be driven by improved EOS gross margin and volume-driven leverage of our Memphis distribution facility. Second quarter non-GAAP R&D was $13.5 million and approximately 9% of sales, compared to $13.1 million and 11% of sales in the prior year. We delivered 190 basis points of R&D leverage while continuing to invest in innovation and the future growth of the business. Non-GAAP R&D spending was roughly flat
Speaker Change: Second quarter non-GAAP R&D was $13.5 million and approximately 9% of sales, compared to $13.1 million and 11% of sales in the prior year. We delivered 190 basis points of R&D leverage while continuing to invest in innovation and the future growth of the business.
Speaker Change: non-GAAP R&D spending was roughly flat sequentially.
Todd Koning: Non-GAAP SG&A was $100 million and approximately 68.9% of sales in the second quarter, compared to $81 million and 69.1% of sales in the prior year period, an improvement of 20 basis points. Included in SG&A is the expected step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 250 basis points year over year. Excluding that impact, SG&A improved by 270 basis points. Two-thirds of the improvement was driven by variable selling expense, with the balance driven by infrastructure.
Speaker Change: non-GAAP SG&A was 100 million and approximately 68.9% of sales in the second quarter, compared to 81 million and 69.1% of sales in the prior year period, an improvement of 20 basis points.
Speaker Change: Included in SG&A is the expected step-up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 250 basis points year over year. Excluding that impact, SG&A improved by 270 basis points.
Speaker Change: Two-thirds of the improvement was driven by variable selling expense with the balance driven by infrastructure leverage.
Todd Koning: Total non-GAAP operating expenses amounted to $114 million and approximately 78% of sales in the second quarter, compared to 94 million and 80% of sales in the prior year period, demonstrating 210 basis points of operating leverage year over year. Total non-GAAP operating expenses were down $1 million sequentially.
Speaker Change: Total non-GAAP operating expenses amounted to $114 million and approximately 78% of sales in the second quarter.
Speaker Change: compared to 94 million and 80% of sales in the prior year period, demonstrating 210 basis points of operating leverage year over year. Total non-GAAP operating expense was down $1 million sequentially.
Todd Koning: In the second quarter, we recorded a positive adjusted EBITDA of $5.6 million and 3.8% of sales. This is compared to a loss of 3.1 million and 3% of sales in the prior year. 650 basis points have improved, and the drop through of the year over year growth and revenue dollars to adjusted EBITDA was strong at 30%. That improvement was driven by 270 basis points of SG&A leverage, followed by 190 basis points of RD leverage, and 190 basis points of gross margin.
Speaker Change: In the second quarter, we inflected a positive adjusted EBITDA of $5.6 million and 3.8% of sales. This is compared to a loss of $3.1 million and 3% of sales in the prior year.
Speaker Change: 650 basis points of improvement.
Speaker Change: The drop-through of the year-over-year growth in revenue dollars to adjusted EBITDA was strong at 30%. That improvement was driven by 270 basis points of SG&A leverage, followed by 190 basis points of RD leverage, and 190 basis points of gross margin leverage.
Todd Koning: The consistent adjusted EBITDA margin expansion that we're driving is aligning solidly with our expectations. This gives us confidence that profitability will continue to expand in future quarters and fuel self-funded growth as we execute on our long-range plan commitment. Turning to the balance sheet, we ended the second quarter with $100 million in cash, and debt at carrying value was $531 million.
Speaker Change: The consistent adjusted EBITDA margin expansion that we are driving is aligning solidly with our expectations.
Speaker Change: This gives us confidence that profitability will continue to expand in future quarters and fuel self-funded growth as we execute to our long-range plan commitments.
Speaker Change: Turning to the balance sheet, we ended the second quarter with $100 million in cash. Debt at carrying value was $531 million.
Todd Koning: Free cash use totaled $45 million, with over $50 million deployed into inventory and instruments that support the expansion of our distribution footprint and new product lines. However, managing the efficiency of those assets being deployed is proving to be slightly less linear than anticipated. As a result, working capital needs have been higher than we initially forecast. Adopting more conservative working capital assumptions for the balance of the year will result in expected full-year cash use ranging between 125 million and 135. This is 25 million higher than the 100 of the 110 million previously expected.
Speaker Change: Free cash use totaled $45 million, with over $50 million deployed into inventory and instruments that support the expansion of our distribution footprint and new product launches.
Speaker Change: Managing the efficiency of those assets being deployed is proving to be slightly less linear than anticipated. As a result, working capital needs have been higher than we initially forecasted.
Speaker Change: Adopting more conservative working capital assumptions for the balance of the year will result in expected full year cash use ranging between $125 million and $135 million.
Speaker Change: This is $25 million higher than the $100 million and the $110 million previously expected.
Todd Koning: Approximately 10 million of the change relates to elevated day sales outstanding, while the remaining 15 million relates to inventory and efficiency. We expect Q3 cash use of approximately $25 to $30 million, with Q4 inflecting cash generation of $5 to $15 million. With a fully drawn revolver, we expect to end the year with approximately $100 million in cash on our balance sheet, which, as we've communicated, is sufficient for us to run the business.
Speaker Change: Approximately 10 million of the change relates to elevated day sales outstanding, while the remaining 15 million relates to inventory inefficiencies.
Speaker Change: We expect Q3 cash use of approximately $25 to $30 million with Q4 inflecting cash generation of $5 to $15 million.
Todd Koning: We continue to expect to achieve free cash flow breakeven in 2025. Now, turning to our updated outlook for the full year 2024. As Pat mentioned, the leading indicators of future revenue growth were exceptional in the second quarter, with a record surge in training engagements and growth in new surge in adoption of 20%. Both are testament to the surge in demand that ATEC Clinical Distinction is experiencing in the field. We expect that to fuel total revenue growth of 25% to approximately $602 million.
Speaker Change: With a fully drawn revolver, we expect to end the year with approximately $100 million in cash on our balance sheet, which, as we've communicated, is sufficient for us to run the business. We continue to expect to achieve free cash flow break-even in 2025.
Speaker Change: Turning to our updated outlook for the full year 2024. As Pat mentioned, the leading indicators of future revenue growth were exceptional in the second quarter, with record surge in training engagements,
Patrick S. Miles: and Growth and New Surgeon Adoption of 20%.
Patrick S. Miles: Both are testament to the surge in demand that ATEC clinical distinction is earning in the field.
Speaker Change: We expect that to fuel total revenue growth of 25% to approximately $602 million. That includes 2024 surgical revenue growth of approximately 27% to $537 million and EOS revenue of approximately $65 million.
Todd Koning: That includes 2024 surgical revenue growth of approximately 27% to $537 million and EOS revenue of approximately $65 million. Calibrating for the impact of territory upgrades that I mentioned earlier, we expect surgical volume growth to continue to be the greatest contributor to surgical revenue growth, increasing at a high teens percent rate for the full year. Territory upgrades will also drive increased growth in revenue per surgery. So we now expect a high single-digit percent growth rate for the full year. Sales growth continues to fuel leverage across our business, and with a second quarter outperformance, we now expect full-year adjusted EBITDA of approximately $25.5 million, which equates to 610 basis points of margin.
Speaker Change: Calibrating for the impact of territory upgrades that I mentioned earlier, we expect surgical volume growth to continue to be the greatest contributor to surgical revenue growth, increasing at a high teens percent rate for the full year.
Speaker Change: Territory upgrades will also drive increased growth in revenue per surgery, so we now expect a high single-digit percent growth rate for the full year.
Speaker Change: Sales growth continues to fuel leverage across our business, and with a second quarter out performance, we now expect full year adjusted EBITDA of approximately $25.5 million, which equates to 610 basis points of margin expansion.
Todd Koning: That implies an approximately 29% drop-through of the year-over-year growth in revenue, a significant acceleration compared to the 22% track through in 2023. I'll close my comments with this view. This chart depicts the deliberate and substantial profitability expansion that we have demonstrated over the last two and a half years. Over that time, adjusted EBITDA has increased substantially from a loss of $13 million and 18% of sales to a contribution of $6 million and 4% of sales, more than 2,000 basis points of improvement.
Speaker Change: That implies an approximately 29% drop-through of the year-over-year growth in revenue dollars, a significant acceleration compared to the 22% drop-through in 2023.
Speaker Change: I'll close my comments with this view.
Speaker Change: This chart depicts the deliberate and substantial profitability expansion that we have demonstrated over the last two and a half years. Over that time, adjusted EBITDA has increased substantially from a loss of $13 million and 18% of sales to a contribution of $6 million and 4% of sales, over 2,000 basis points of improvement.
Todd Koning: Importantly, we are not done. We recognize that profitability and cash generation are crucial to value creation. The progress that we have delivered, along with the drivers of that progress, contributing in the way that we intended, gives us confidence in our future. There's a lot of work left to do and a lot to be excited about. As usual, we have an active IR calendar for the next few months and are looking forward to connecting with you. With that, I'll turn the call back to Pat.
Speaker Change: Importantly, we are not done. We recognize that profitability and cash generation are crucial to value creation. The progress that we have delivered, along with the drivers of that progress, contributing the way in which we intended, give us confidence in our future commitments.
Speaker Change: There's a lot of work left to do and a lot to be excited about. As usual, we have an active IR calendar in the next few months and are looking forward to connecting with you. With that, I'll turn the call back to Pat.
Patrick S. Miles: Thanks much, Todd. I would just conclude the call by saying, prior to Q&A, that we have a track record of execution, and this has been a deliberate spine focus long game.
Patrick S. Miles: Thanks much, Todd. I would just conclude the call by saying, prior to Q&A, of saying we have a track record of execution. This has been a deliberate...
Patrick S. Miles: And so we're executing via a procedural strategy. I think we have just launched the most unique ecosystem in all of spine to inform better spine surgery. And I think it's unquestionable that we are advancing the field. And so with that, we will take questions. Great.
Patrick S. Miles: Spine Focus Long Game. And so we're executing via a procedural strategy. I think we have just launched the most unique ecosystem in all of spine to inform better spine surgery, and I think it's unquestionable that we are advancing the field. And so with that, we will take questions.
Unknown Executive: We will now open the floor up for questions. To accommodate everyone on the call today, please limit yourself to one question. In order to ask a question, press star, then the number one on your telephone keypad.
Speaker Change: Great. We will now open the floor up for questions. To accommodate everyone on the call today, please limit yourself to one question.
Speaker Change: In order to ask a question, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.
Vikramjeet Singh Chopra: If you would like to withdraw your question, press star one again. Thank you. The first question comes from Vik Chopra with Wells Fargo. Hey, good afternoon, and thanks for taking the question. So just on the cash burn, obviously higher than we were expecting. So I just wanted to confirm that you're now expecting $125 to $135 million in cash burn for 2024. Is that right?
Unknown Executive: That's correct. Okay, and just so I guess to follow up on that, you know, will we need to raise cash again before turning cash flow break even in 2025? Yeah, Vic, I think as we look at it, and if you look at the growth next year, I think if you take where the streets are at, that's about $123 million of year-over-year revenue growth, take about 35% of that, and you get about $45 million of growth in adjusted EBITDA year over year. So if you exit this year at $25.5, and you add $45 to that, you get about $70 million of adjusted EBITDA next year.
Speaker Change: The first question comes from Vik Chopra with Wells Fargo. Please go ahead.
Unknown Executive: That ultimately funds our working capital and our growth needs and our cash needs for next year. And so I think going into next year, we feel very good about achieving our cash flow breakeven with our existing liquidity where we are today. Because ultimately, as we look at our current second half cash burn, thinking that we'll exit the year with a fully drawn revolver at about $100 million going into next year, then with the dynamics that I just laid out in terms of increased adjusted EBITDA on the basis of a drop through of year over year revenue growth.
Vikramjeet Singh Chopra: Hey, good afternoon and thanks for taking the questions.
Vikramjeet Singh Chopra: So, just on the cash burn, obviously higher than we were expecting. So, I just wanted to confirm, you're now expecting $125 to $135 million cash burn for 2024, is that right?
Speaker Change: That's correct.
Speaker Change: Okay, and just so, I guess, to follow up to that, you know, will we need to raise cash again before turning cash flow break even in 2025, and then how to follow up?
Speaker Change: Yeah, Vic, I think as we as we look at it, and if you look at the growth next year, I think if you take where the where the streets at, that's about $123 million of year-over-year revenue growth, you take about 35% of that, you get about $45 million of growth.
Speaker Change: In the adjusted EBITDA year over year. So if you exit this year at $25.5, you add $45 to that, you get about $70 million of adjusted EBITDA next year.
Speaker Change: That ultimately funds our working capital and our growth needs.
Speaker Change: in our cash needs for next year. And so I think going into next year, we feel very good about achieving our cash flow break even with our existing liquidity where we're at today. Because ultimately, as we look at our current- our current second half cash burn,
Speaker Change: thinking that we'll exit the year with a fully drawn revolver at about 100 million dollars going into next year then with the dynamics that I just laid out in terms of increased adjusted EBITDA on the basis of drop-through of the year-over-year revenue growth.
Unknown Executive: Okay, and then just to follow up, can you just talk about some of the expected hiring trends for 2024 and give any color on the cadence of competitive rep recruitment? Thank you. Yeah, Vic, thanks for the question. I would tell you that it's robust.
Speaker Change: Okay, and then just to follow up, can you just talk about some of the expected hiring trends for 2024 and any color on the cadence of competitive recruitment? Thank you.
Patrick S. Miles: And kind of the approach that we've taken has been as geographic dependent as our needs are. And so I'm going to try to provide a little bit of color with a pie chart that just shows you clearly a fair amount from Globus, Nuva, but also Medtronic, J&J, and the rest. And so it's, you know, it's been as if we could take on as many people as I feel like we want to. The question becomes, what makes most sense in what geographies at what times.
Speaker Change: Yeah, Vic, thanks for the question. I would tell you that it's robust, and kind of the approach that we've taken has been...
Speaker Change: as geographic dependent as our needs are.
Speaker Change: and and so
Speaker Change: Try to provide a little bit of color with the pie chart that just shows you clearly a fair amount from Globus, Nuva, but also Medtronic, J&J, and the rest.
Speaker Change: It's, you know, it's been as...
Speaker Change: We could take on as many people as I feel like we want to.
Speaker Change: The question becomes is what makes most sense in what geographies at what time?
Patrick S. Miles: And so, as you appreciate, these things take significant investment; we got to make sure that all the instruments and implants are available to them so that they can start the process of turning on their business. And it's a lumpy exercise.
Speaker Change: And so, as you appreciate, these things take significant investment, we've got to make sure that all the instruments and implants are available to them so that they can start the process of turning on their business. And it's a lumpy exercise, but, you know, it's happening at the rate that we desire.
Caitlin Cronin: But, you know, it's happening at the rate that we desire. All right, I think we're going to go to the next caller. The next caller is Caitlin Cronin with Canaccord Genuine. Genuity. Sorry about that.
Speaker Change: All right, I think we're gonna go to the next caller. The next caller is Caitlin Cronin with PanaCore Genuine.
Speaker Change: Genuity. Sorry about that. Please go ahead.
Caitlin Cronin: Please go ahead. Hey, everyone. Thanks for taking the questions. Just starting with the territory upgrades, where are you in implementing these? And how many territories have you upgraded or expect to upgrade?
Caitlin Cronin: Hey, everyone. Thanks for taking the questions. Just starting with the territory upgrades, where are you in implementing these, and how many territories have you upgraded or expect to upgrade?
Patrick S. Miles: Yeah, it's, it's, it's an interesting question, just from the standpoint of where we are as a company. And so I look at us as having 94% of the market to go. That means we're about a 6% market shareholder. And I would say that, you know, let's just say, you know, we're probably well less than a third of the size of, say, a Medtronic salesforce. We have opportunities for the next, I'd say, eight years. And so, again, I think what is mistaken is that the disruption in the marketplace is a several-year tailwind.
Speaker Change: Yeah, it's an interesting question just from the standpoint of where we are as a company.
Speaker Change: And so I look at us as having 94% of the market to go. That means we're about a 6% market shareholder.
Speaker Change: And I would tell you that, you know, let's just say, you know, we're probably well less than a third of the size of, say, Medtronic Salesforce.
Speaker Change: We have opportunities for the next.
Speaker Change: I'd say eight years. And so, again, I think what is is mistaken is that the disruption in the marketplace is a several year tailwind.
Speaker Change: And the great part is, is that what, what...
Speaker Change: Sales reps want is they want surgeons who are compelled by new and exciting technology.
Patrick S. Miles: And the great part is that what sales reps want is surgeons who are compelled by new and exciting technology. And so our opportunity to compel sales reps to come along with their surgeons who are inspired by our technology is available to us in space. What we're trying to do is march toward an operating company, and so we're doing that in a very methodical way. And that means what we're doing is prioritizing those territories that are most opportune for significant, expedient, profitable growth. Okay, great. Thanks.
Speaker Change: And so our opportunity to compel.
Speaker Change: Sales reps to come along with their surgeons who are inspired by our technology is Available to us in space What we're trying to do is march toward a operating company
Speaker Change: And so, we're doing that in a very methodical way, and that means what we're doing is prioritizing those territories that are most opportune for significant, expedient, profitable growth.
Caitlin Cronin: And then just to follow up on the competitive hires. Thanks for noting the breakdown of the hires. But, you know, what's the most up to date number of the hires?
Speaker Change: Okay, great, thanks. And then just to follow up on the competitive hires, thanks for noting the breakdown of the hires, but, you know, what's the most up-to-date number of the hires? I think the last that you mentioned was 50 reps.
Patrick S. Miles: I think the last that you mentioned was 50 reps. Yeah, we're not going to share the quarter-to-quarter hiring practices. And, you know, our desire is to get a rep toward a toward a $2 million a year type of cadence. And so you could probably do the math and get to a place where you feel reasonably well about, you know, kind of where we're heading. And so, just from a pure volumetric perspective, but again, I would tell you that the people that make up our sales training classes are reflective of the pie chart that we had delivered.
Speaker Change: Yeah, we're not going to share the quarter-to-quarter hiring practices. And, you know, our desire is to get a rep toward a $2 million a year type of a cadence. And so...
Speaker Change: You could probably do the math and get to a place to where you feel reasonably well about, you know, kind of where we're heading. And so, just from a pure volumetric perspective, but again, I would tell you that...
Speaker Change: The people that make up our sales training classes are reflective of the pie chart that we had delivered and the volume of reps will continue to grow as we run toward a billion.
Patrick S. Miles: And, and the volume of reps will continue to grow as we run toward a billion. And I think the greatest indicator for future sales growth ultimately becomes the surge in adoption that grew at 20% again in the second quarter, and then clearly the surge in engagements at 244, which was just a very significant quarter's worth. Yeah, I was just to add to Todd's point, which is a great one, which is, you don't get near 250 surgeons to engage in your surgeon training events if there's no interest in what you're doing clinically.
Speaker Change: And Caitlin, I think the greatest indicator for future sales growth ultimately becomes
Caitlin Cronin: The surge in adoption that grew at 20% again.
Speaker Change: in the second quarter, and then clearly the surge in engagements at 244, which was just a very significant quarter's worth.
Speaker Change: Yeah, I would say, just to add to Todd's point, which is a great one, which is, you know, you don't get near 250 surgeons to engage in your surgeon training events if there's not interest in what you're doing clinically.
Patrick S. Miles: And to me, it's such an apparent dynamic. And, you know, I feel like we're just trying to be as thoughtful and appropriate as we can with regard to who's coming through. And I think it's reflective of the territory upgrades and additions that we've been making. Great, thanks so much. All right, our next question comes from Josh Jennings with TD Cowan. Please go ahead. Hi guys, this is Eric on behalf of Josh.
Speaker Change: And to me, it's such an apparent dynamic.
Speaker Change: And, you know, I feel like we're just trying to be as thoughtful and appropriate as we can with regard to who's coming through. And I think it's reflective of the territory upgrades and additions that we've been making. Totally.
Speaker Change: Great, thanks so much.
Speaker Change: All right, our next question comes from Josh Jennings with TD Cowen. Please go ahead.
Joshua Thomas Jennings: Thanks for taking the question. I was hoping to just put a finer point on expectations for cash burn through the end of the year. I appreciate the color you gave around cash use through 3Q and 4Q. But if you could just talk through the drivers that flip into positive cash use in 4Q, that would be great. And then what risks do you see to that pathway?
Speaker Change: Hi guys, this is Eric on for Josh. Thanks for taking the question.
Eric: I was hoping to just put a finer point on expectations for cash burn through the end of the year. I appreciate the color you gave around cash use through 3Q and 4Q, but if you could just talk through the drivers of that flip into positive cash use in 4Q, that would be great. And then what risks do you see to that pathway?
Todd Koning: Thank you, Eric. As we look at Cash Use. Maybe I'll just take a minute to talk about the incremental 25 that were, Assuming for the second half relative to previous experience or previous communications, that is really due to about $10 million of that due to day sales outstanding. So, if you think about where we exited last year, which was kind of in the high forties, Q2 was in the low fifties, we're about five days different than, frankly, I expected us to be So, five days times $2 million a day gets you about $10 million.
Eric: Thank you, Eric.
Speaker Change: As we look at, you know,
Speaker Change: The cash use and maybe I'll just take a minute to to talk about the incremental 25 that we're assuming for the second half relative to previous experience or previous communications.
Speaker Change: Bye!
Speaker Change: That is really due to about $10 million of that due to day sales outstanding. So if you think about where we exited last year, which was kind of in the high 40s.
Speaker Change: Q2 was in the low 50s. We're about five days different than frankly I expected us to be at this point in time. So five days times two million dollars a day gets you about ten million.
Todd Koning: The remaining 15 percent of that has to do with inventory inefficiencies and really the confluence of growing a business at 25 to 30% a year, increasing the size and the volume of new sales agencies, ensuring that they have what they need when they need it. All of that is a lot of variables in that experience. And so when you're growing at the rate that we've been growing, there's definitely been some variability there. We've been less efficient at that than I expected.
Speaker Change: The remaining 15 of that has to do with inventory and efficiencies and really the confluence of growing a business at 25-30% a year, bringing the size and the volume of new sales agencies on.
Speaker Change: ... ensuring that they have what they need when they need it. All of that is a...
Speaker Change: A lot of variables in that experience. And so when you're growing at a rate that we've been growing, there's definitely been some variability there. We've been less efficient in that than than I expected. And so that's the drivers.
Todd Koning: And so that's the driver behind this. Ultimately, I think we get through that over time, and we improve in those metrics. But I'm now assuming that we won't improve at the end of the year.
Speaker Change: Behind this, ultimately, I think we get through that over time and we improve in those metrics.
Speaker Change: But I'm now assuming that we don't improve at the end of the year and so that's that's really the dynamic that we're going through here.
Todd Koning: And so that's really the dynamic that we're going through here. You know, ultimately, when you think about the inflection to cash, part of that is that we have invested significantly in the sets in the inventory in the first part of this year, as you know. And so that obviously is a trend downwards through the second half of the year. And then as we inflect profitability, that ultimately drives cash generation. And so it's really the inflection of those two variables going in opposite directions that really shifts you from cash burn to cash generation.
Speaker Change: Ultimately, when you think about the inflection, the cash.
Speaker Change: Part of that is, we have invested significantly in the sets in the inventory in the first part of this year, as you know, and so that obviously is a trend downwards through the second half of the year, and then as we inflect a profitability, that ultimately drives cash generation, and so it's really the inflection of those two
Speaker Change: variables.
Speaker Change: going in opposite directions that really inflects you from cash burn to cash generation. I mean, this is really all about sales growth and profitability growth flowing into cash flow here the rest of the year and into the future.
Todd Koning: I mean, this is really all about sales growth and profitability growth flowing into cash flow for the rest of the year and into the future. Okay, I appreciate that. And then on EOS, with the launch of Insight now in play, I was hoping just to get your thoughts on some of the inbound interest that you and the team have been fielding with that now up and out in the field. And just as a technical question on EOS, I believe it's a software-based platform. So is upgrading existing EOS systems as simple as just pushing that software out to customers? Or is there something more involved required to get adopters up and running? Thanks for the questions.
Speaker Change: Okay, appreciate that. And then on Eos, with the launch of Insight now in play, I was hoping just get your thoughts on
Speaker Change: Some of the inbound interest that you and the team have been fielding with that now up and out in the field. And just as a technical question on EOS, I believe it's a software-based platform.
Speaker Change: Is upgrading existing EOSystems as simple as just pushing that software out to customers, or is there something more involved required to get adopters up and running?
Patrick S. Miles: Yeah. Thanks, Eric. So just the straightforward one first is, at this point, we go out, and it's a software upgrade on the machine. We don't push it yet. There will be, there's work going on right now that will enable us to push all software upgrades out.
Speaker Change: Thanks for the questions. Yeah. Yep. Thanks, Eric. So just, I guess, the straightforward one first is, at this point, we go out and it's a software upgrade on the machine. We don't push it yet. There will be, there's work going on right now that will enable us to push all software upgrades out.
Speaker Change: This is kind of our first real significant type of...
Speaker Change: of Software Solution. It's it's it's a, you know, the reason I spent so much time on it is it is the reflection of a of a the most coveted
Patrick S. Miles: This is kind of our first real significant type of Software Solution. It's a, you know, the reason I spent so much time on it is that it is the reflection of the most coveted image in all of spine being integrated into an informatic tool. And it's, it's, it is very significant. And, and, you know, maybe much like the narrowness of the way we think of SafeOp in relation to our lateral portfolio.
Speaker Change: Image in Olive Spine being integrated into an informatic tool.
Speaker Change: And it is very significant.
Speaker Change: And, you know, maybe much like the narrowness of the way we think of SAFOPP to our lateral portfolio,
Patrick S. Miles: The whole EOS into spine care, I think, is a, is a monumental achievement. And so it'll play out over time. We have great confidence it'll play out over time. Right now, it's a software solution that is really kind of just the beginning of a, of a, of a very long run. But if, you know, maybe next time I could show the faces of the surgeons who come through here for a visit when they see the tools that are provided through EOS Insight, it'll probably be the reflection of enthusiasm around. That's great. Our next question comes from Matt Blackman with Stifle. Please go ahead. Good afternoon, everybody. Can you hear me okay?
Speaker Change: The whole EOS into spine care, I think, is a monumental achievement.
Speaker Change: And so it'll play out over time. We have great confidence it'll play out over time. Right now, it's a it's a software solution that is really kind of just the beginning of a of a very long run. But if, you know,
Speaker Change: Maybe next time I could show the faces of the surgeons who come through here for a visit when they seek the tools that are provided through EOS Insight. That would probably be the best reflection of enthusiasm around the platform.
Speaker Change: That's great. Thank you, guys.
Speaker Change: Our next question comes from Matt Blackman with Stifle. Please go ahead.
Mathew Justin Blackman: Good afternoon everybody. Can you hear me okay?
Mathew Justin Blackman: Yes, we can, man. Great. So Todd, I wanted to go back to the 15% volume growth. If I'm hearing you correctly, it sounds like there was some dislocation as you switched territories around. I guess why it is manifesting now versus maybe a couple of quarters ago; maybe it has something to do with Timing of Instrument Set Deployments, but how long does this persist? I mean, Salesforce dislocation can be tricky to work your way through.
Speaker Change: Yes, we can, Matt.
Mathew Justin Blackman: Oh, great. So, Todd, I wanted to go back to the 15% volume growth.
Mathew Justin Blackman: So, if I'm hearing you correctly, it sounds like there was some dislocation as you switched territories around. I guess, why is it manifesting now versus maybe a couple of quarters ago? Maybe it has something to do with...
Speaker Change: Timing of Instrument Set Deployments
Speaker Change: But how long does this persist? I mean, Salesforce dislocation can be tricky to work your way through. It does seem like, as I think about your guide, your updated guide,
Todd Koning: It does seem like, as I think about your guide, your updated guide for volume growth, that you've sort of baked it in for the remainder of the year. Is that how we should be thinking about it? Does it potentially bleed into 2025, and then I have one actual follow-up? Yeah, and I thank you for the question because I don't want to communicate that there is unexpected dislocation. This is a phenomenon where we have added sales, coverage sales agents in a territory where we have new surgeon interest. That surgeon interest is in our most distinct portfolio, which is really the lateral portfolio. And ultimately, we are upgrading that territory sales agency. And, ultimately, the existing sales agents wind down. So that's normal; they always wind down when the new guys start and come on.
Speaker Change: for volume growth that you've sort of baked it in for the remainder of the year. Is that how we should be thinking about it? Does it potentially bleed into 2025? And then I have one actual follow-up question.
Speaker Change: Yeah, and I thank you for the question, because I don't want to communicate that there is unexpected dislocation. This is a phenomenon where we added sales.
Speaker Change: coverage, sales agents.
Speaker Change: In a territory where we have new surge in interest, that surge in interest is in our most distinct portfolio, which is really the lateral portfolio, and ultimately we are upgrading that territory sales agency.
Speaker Change: and ultimately the existing sales agents wind down. So that's the normal.
Speaker Change: They always wind down when the new guys wind up and come on.
Speaker Change: What was a little bit unexpected this time was the pace at which the existing guys wound their business down. Now the reality is, the ASP of the business that has come on in that territory
Todd Koning: What was a little bit unexpected this time was the pace at which the existing guys wound their business down. Now the reality is that the ASP of the business that has come on in those territories is lateral. So it's two, it's two x our average, that's a 15 to $20,000 procedural price.
Speaker Change: is lateral, so it's 2X our average, that's a $15,000 to $20,000 procedural price. What walked away was a $3,000 to $5,000 procedural price.
Todd Koning: What walked away was, you know, three to $5,000 per procedure. And so when we attract surgeons who are most interested in our most distinct portfolio, ultimately, you drive a higher level of revenue per procedure, and you always do expect the existing business to ramp down at some point in time. I would just tell you that it happened a little bit faster than we anticipated this quarter. And so that's the dynamic that went on. Does that make sense? Yeah, no, it doesn't.
Speaker Change: And so, when we attract surgeons who are most interested in our most distinct portfolio, ultimately,
Speaker Change: You drive a higher level of revenue per procedure, and you always do expect the existing business to ramp down at some point in time. I would just tell you that it happened a little bit faster than we anticipated this quarter.
Speaker Change: So that's the dynamic that went on so that because you know it doesn't does that persist It does seem like you're baking it in for the remainder of the year with
Todd Koning: Does that persist? It does seem like you're baking it in for the remainder of the year with the updated guidance. Does that persist for a quarter or two quarters?
Speaker Change: with the updated guidance. Does that persist for a quarter or two quarters? Obviously, I would expect it improves, but when do you think you get back onto that sort of typical trajectory of whether it's surgeon productivity or rep productivity?
Todd Koning: Obviously, I would expect it to improve. But you know, when do you think you get back onto that sort of typical trajectory of whether it's surging? Productivity or Reproductivity, in terms of volume growth as opposed to age?
Speaker Change: In terms of volume growth as opposed to ASP growth.
Todd Koning: Yeah, so I think right now we're assuming essentially kind of high teens volume growth in the second half, which is really what we saw here. I guess we saw mid teens in the second quarter. So you're starting to see that tick up a little bit in the second half. So we see a little bit of that recovery in the second half.
Speaker Change: Yeah, so I think at the at now we're assuming essentially kind of high teens volume growth in the second half, which is really
Speaker Change: What we saw here, I guess we saw mid-teens.
Speaker Change: Unknown Speaker in the second quarter. So you're starting to see that tick up a little bit in the second half. So we see a little bit of that recovery in the second half. That's kind of how we see that playing out. And ultimately, the revenue per procedure that's implied in that
Todd Koning: So that's, that's kind of how we see that playing out. And ultimately, the revenue per procedure that's implied in that, Q3, the implication there is it's kind of high single digits. Q4, it gets back to mid-single digits. So I think that effectively gets modeled in the remainder of the year between price and unknown Speaker.
Speaker Change: Q3 the implication there is it's kind of high single digits. Q4 it gets back to mid single digits. So I think that's that's how that effectively gets modeled in the remainder of the year between price and revenue and volume.
Unknown Executive: Thank you. Thank you. Thank you. Thank you. And got it. And I guess that sort of the counter that would be, I mean, obviously, we're all thinking a bigger picture here, particularly given the amount of investment, in new distributors, new reps, instrument sets, sort of hoping, potentially some uptick in growth, is the point, and maybe it comes, maybe it doesn't, but maybe the point would be, if we just look at, in particular, maybe we're not seeing it in the actual dollars yet here in the first and the second quarter of 24, but we should be comforted by the fact that, you know, particularly here in the first half of the year, your surgeon training numbers are pretty substantial, and therefore, that's an indication that these reps are, in fact, bringing in new surgeons, and so that is the real metric we should be sort of leaning on as we think about the outlook for growth from here. Is that fair?
Speaker Change: And got it. And I guess the counter to that would be, I mean, obviously we're all thinking a bigger picture here, particularly given the amount of investment in new distributors, new reps, instrument sets, sort of hoping to see potentially some uptick in growth.
Speaker Change: is the point, and maybe it comes, maybe it doesn't, but maybe the point would be...
Speaker Change: If we just look at in particular, maybe we're not seeing it in the actual dollars yet here in the first and the second quarter of 24.
Speaker Change: But we should be comforted by the fact that...
Speaker Change: You know, particularly here in the first half of the year, your surgeon training numbers are pretty substantial.
Speaker Change: And therefore, that's an indication that these reps are, in fact, bringing in new surgeons. And so that is the real metric we should be sort of leaning on, as we think about the outlook for growth from here. Is that fair? I think that's exactly the point, Matt.
Mathew Justin Blackman: I think that's exactly the point, Matt, and, you know, as you look at that, I think the guide implies probably a 2 million sequential step up in our surgical revenue, I think, and so when you look at that, I think that reflects the underlying confidence that we have in the growth of the business looking forward. Yeah, it's, it is a nonlinear walk. And, you know, I never thought that we'd be apologizing for 27% top-line surgical growth. But I totally, totally understand your questions. But it is, it is, it is a put and take at every turn. And maybe I'm just going to sneak in one more question. Apologies to everyone else here.
Speaker Change: You know, as you look at that, the guide implies
Mathew Justin Blackman: probably a 2 million sequential step up in our surgical revenue I think and and so when you look at that I think that reflects the underlying confidence that we have in the growth of the business looking forward.
Mathew Justin Blackman: Yeah, it is a nonlinear walk and you know I never thought that we'd be apologizing for 27% top-line surgical growth, but totally understand your questions, but it is a put and take at every turn.
Speaker Change: And maybe I'm just going to sneak in one more question. Apologies to everyone else here. But just on EOS, I guess the simple question is,
Patrick S. Miles: But just on EOS, I guess the simple question is, is EOS now at a point where it is a workhorse imaging system with all the enhancements, or is there something else perhaps that we're waiting for in the near term pipeline that really sort of moves this to again be a workhorse imaging system that a physician can use across 70% of their body? Yeah, I would say it's a workhorse imaging system that has no competitor. It's, you know, the problematic dynamic of imaging is that it is profoundly inconsistent at different magnifications. It's imprecise.
Speaker Change #102: Is EOS now at a point where it is a workhorse imaging system with all the enhancements, or is there something else perhaps that we're waiting for in the near-term pipeline that really sort of moves this to, again, a workhorse imaging system that a position
Speaker Change: can use across, you know, 70% of their procedures.
Speaker Change: Yeah, I would say it's a workhorse imaging system that has no competitor.
Speaker Change: It's...
Speaker Change: The problematic dynamic of imaging is that it is profoundly inconsistent with different magnification. It's imprecise.
Speaker Change: And just the ability to have a standard image out of EOS provides for opportunity of grand scale. It's a...
Patrick S. Miles: And just the ability to have a standard image out of EOS provides for opportunities of a grand scale. It's a, I cannot communicate my enthusiasm more with regard to how we translate that image into an informatic tool that improves surgical care. We're well on the way to identifying a diagnostic platform whereby what we can do is pull in different tools again to drive more clarity with regard to what patients require what surgery informed by a set of data that's derived in an automated way. It's like these are things that have evaded spine in the 30 years I've been part of it.
Speaker Change: We're well down the way of identifying a diagnostic platform, whereby what we can do is pull in different tools, again, to drive more clarity with regard to...
Patrick S. Miles: And so to be able to be part of this and to support the architecture of it through the many luminary surgeons who have kind of advised us is phenomenal. So, again, the proof's in the pudding, and we're going to be around to show you the pudding. It's an exciting time. All right, thanks, Pat. And apologies for the more than one question, Tina. No issue. All right, our next question comes from Drew Ranieri from Morgan Stanley. Please go ahead. And maybe a couple from me that I'll ask together.
Speaker Change: All right. Thanks, Pat. And apologies for the more than one question, Tina. No issue.
Speaker Change: All right, our next question comes from Drew Ranieri from Morgan Stanley. Please go ahead.
Speaker Change: Hi, thanks for taking the questions. Just maybe a couple from me.
Andrew Christopher Ranieri: So, Todd, I think you called out some supply constraints that you maybe now have resolved in biologics and expandables. Just curious if you can quantify maybe how much that might have cost you in revenue upside potentially for the quarter. And I'll just ask my second question here as well.
Unknown Speaker: Unknown Speaker That I'll ask together. So Todd, I think you called out some supply constraints that you maybe now resolved and biologics and expandables. Just curious if you can quantify maybe how much that might have cost you and revenue upside potentially for the quarter. And I'll just ask my second.
Andrew Christopher Ranieri: But we've been getting more investor inbounds just kind of questioning the overall utilization environment, specifically when it comes to orthopedic and spine names. So, I mean, you have 5%, 6% market share in the US, Pat or Todd or Todd. Just hoping to get your perspective on maybe what you're seeing in the market and maybe what you're seeing specifically for surgeons that you have longer established relationships with. Thanks for taking the time to answer the questions. I'll take the first one; maybe Pat can take the second one on utilization.
Speaker Change #100: I'll take the first one, maybe Pat can take the second on the utilization.
Todd Koning: So, Drew, relative to supply constraints, I did call out two items where we really outgrew our supply. Ultimately, that's now resolved. We're not going to quantify all that, but suffice it to say, as we think about our sequential Q2 to Q3 in surgical revenue, our expectation would be to go from $130 to $132 million sequentially. So, I think that should give you a sense for our level of confidence going into the third quarter and kind of sizing up and quantifying the overall impact of the dynamics we saw, and with regard to utilization. There's really been like, it's always tough.
Speaker Change: So...
Todd Koning: Drew, relative to supply constraints, I did call out a few items where we really outgrew our supply.
Todd Koning: Ultimately that's that's now resolved.
Speaker Change: We're not going to quantify all of that, but I think suffice it to say, as we think about our sequential Q2 to Q3 in surgical revenue, I think our expectation would be to go from $130 to $132 million.
Speaker Change: Sequentially, so I think that should give you a sense for, you know, our level of confidence going into the into the third quarter and and kind of sizing up and quantifying the overall impact of the dynamics we saw in the second quarter.
Patrick S. Miles: Like, you know, we're a 6% market shareholder; we're a proxy for nothing. I always like to say this just because it's like we don't have as wide of a visibility on the market per se. But I would say it's been pretty typical.
Speaker Change #108: There's really been, like, it's always tough. Like, you know, we're a 6% market shareholder. We're a proxy for nothing.
Patrick S. Miles: And so at least kind of what we've seen exiting Q1 and through Q2, it's been a relatively typical time. Okay, we'll go to the next caller. Brooks O'Neill with Lake Street Capital Markets. Please go ahead. Hey guys, this is Aaron on the line for Brooks.
Speaker Change: Okay, we'll go to the next caller. Brooks O'Neill with Lake Street Capital Markets. Please go ahead.
Unknown Attendee: Thanks for taking the questions. I was wondering if you could just give us an update on Japan and maybe how you're thinking about that market timing wise. You know, I'm appreciating the existing penetration in Australia and New Zealand, but if you just could have any specific time horizons that you're thinking about either in the short or long term.
Aaron: Hey guys, this is Aaron on the line for Brooks. Thanks for taking the questions. I was wondering if you could just give us an update on Japan and maybe how you're thinking about that market timing wise. You know, I'm appreciating the existing penetration in Australia and New Zealand, but if you just could have any specific time horizons that you're thinking about, either in the short or long term. Thank you.
Patrick S. Miles: Thank you. Yeah, I'm super excited about Japan; a lot of the regulatory stuff is coming through. We hope to, you know, at least say, hey, we've done surgery in Japan in the fourth quarter. And and so, so much of who we are as an organization is making commitments on timetables, and that was a commitment that we made. And we said, you know, Q3 to Q4 of 24 for our first experience.
Speaker Change: Yeah.
Speaker Change: I'm super excited about Japan. A lot of the regulatory stuff is coming through.
Speaker Change #106: We hope to like you know at least say hey we've done a surgery in Japan in the fourth quarter and and so if so much of I think who we are as an organization is making commitments on timetables.
Speaker Change #106: And that was a commitment that we made, and we said, you know, Q3 to Q4 of 24 for our first experience, and I like our chances. And so,
Patrick S. Miles: And I like our chances. And so that will be a market that we're going to expect a lot out of over a long period of time; we're going to give it the necessary tools and time to create the very market that we expect from Japan. So anyway, I'm super excited about Japan.
Speaker Change #106: That will be a market that we're going to expect a lot out of over a long period of time. We're going to give it the necessary tools and time to create the very market that we expect out of Japan. So, anyway, super excited about Japan.
Speaker Change: Great. Appreciate it, Pat. Thank you.
Unknown Attendee: Great. I appreciate it, Pat. Thank you. All right, our next caller is David Saxon with Needham. Please go ahead. Good afternoon, Pat and Todd.
Speaker Change: All right, our next caller is David Saxon with Needham. Please go ahead.
David Joshua Saxon: Thanks for taking my questions. Todd, I just wanted to follow up on the free cash flow guidance change. So what specifically is causing the DSOs to go up?
David Joshua Saxon: Great. Good afternoon, Pat and Todd. Thanks for taking my questions.
David Joshua Saxon: Todd, I just wanted to follow up on the free cash flow guidance change. So what specifically is causing the DSOs to go up? How confident are you that the DSOs and inventory dynamics won't get worse?
Speaker Change #101: And I guess, do you still have confidence in the 2025 break-even target? And I have just one quick follow-up.
David Joshua Saxon: How confident are you that the DSOs and inventory dynamics won't get worse? And, I guess, do you still have confidence in the 2025 break-even target? Thanks, David.
David Joshua Saxon: Thanks, David.
Speaker Change #107: On the DSO, I would say they just have not improved the extent that we expected them to.
Todd Koning: On the DSO, I would say they just have not improved to the extent that we expected them to. So we were, I think, 40 like mid, mid to high 40s exiting last year, and we stepped up significantly in Q1. And I think that also had to do with some customer dynamics out there. I think there were some cybersecurity items that hit different customers that delayed payments.
Speaker Change #111: 40 like mid to high 40s exiting last year.
Speaker Change #109: stepped up significantly in
Speaker Change #114: Q1 and I think that also had to do with some customer dynamics out there. I think there were some there were some cybersecurity items that have hit different
Todd Koning: Ultimately, we saw a significant improvement from, or we saw an improvement from Q1 to Q2. And we just have not seen as much of it. And so I think some of that may be associated with just some of our general customer mix in terms of where we're growing. So my expectation is that we're not going to improve to where we were exiting last year. And so fundamentally, we saw a step up from Q4 to Q1. We stepped down from Q1 to Q2, just not by as much as I had expected. And so I'm not expecting any further improvement on that front.
Speaker Change #107: customers that
Speaker Change #107: Delayed payments.
Speaker Change #107: Ultimately, we saw an improvement from Q1 to Q2.
Speaker Change #107: And we just have not seen as much of it.
Speaker Change #107: So I think some of that may be also associated with just some of our general customer mix in terms of where we're growing. So my expectation is that we're not going to improve to where we've been exiting last year.
Speaker Change #107: Fundamentally...
Speaker Change #107: We saw a step up Q4 to Q1, we stepped down Q1 to Q2, just not as much as I expected to. And so I'm expecting no further improvement on that front. On the inventory, the DOH,
Todd Koning: On the DI, or on the inventory, the DOH, you know, I think we're at about four, a little over 400 here in the second quarter. Ultimately, as we're growing, I think this has been a dynamic of just how efficient and how much needs to go to each different sales agent as they ramp up. And so I think as we've looked at it, we're assuming no further improvements. We're putting a lot of effort and energy into the organization to get better at that and improve it.
Speaker Change #107: We're at a little over 400 here in the second quarter. Ultimately, as we're growing, I think this has been a dynamic of just how efficient, how much needs to go to each different sales agent as they ramp up.
Speaker Change #107: And so I think as we've looked at it, we're assuming no further improvements. We've we're putting a lot of effort and energy in the organization to get better at that. And to improve it. I'm just I'm just assuming that we don't
Todd Koning: I'm just assuming that we don't see those improvements. And so it's really, we did not see the improvements that we expected to see through our activities in the first half of the year. So I'm assuming that we won't see them in the second.
Speaker Change #107: We don't see those improvements, and so it's really, we did not see the improvements that we expected to see through our activities in the first half of the year, so I'm assuming that we don't see them in the second half of the year.
Todd Koning: And then your follow-up to that is 2025, right? Yeah, so I think, as we've said before, the belief in cash flow and cash break-even is a function of the belief in top-line growth. The top-line growth creates the opportunity then for us to expand profitability. The expansion of profitability ultimately funds and feeds our cash flow. So if you think that – well, we can look at the consensus. That's about $120 million of growth next year. Thirty-five percent of that, you get $45 million of adjusted EBITDA on the year-over-year drop-through.
Speaker Change #110: And then your follow-up to that is 2025, right? Yeah. So, you know, as...
Speaker Change #112: I think as we've said before, the belief in the cash flow and the cash break-even is a function of the belief in the top-line growth. The top-line growth...
Speaker Change #104: Chris, the opportunity then for us to expand profitability, the expansion of the profitability ultimately funds and feeds.
Speaker Change #104: Unknown Speaker Our cash flow. And so if you think that the well, we can look at consensus. That's about 120 $25 million of growth next year. 35% of that you get $45 million of adjusted EBITDA on the year over year drop through. So if we exit this year at 25 and a half and you add 45, you get $70 million. So that would be $7 million to essentially
Todd Koning: So if we exit this year at 25.5 and you add 45, you get $70 million. So that would be $7 million to essentially invest in sets and inventory and what you need next year. And so ultimately, we've got a lot of adjusted EBITDA that ultimately funds the working capital needs of the business in 2025. And so my confidence in achieving cash flow was a function of my confidence in the top line growth, which is predicated on the surge in adoption that we're seeing and the strong competitive sales reps and hiring that we're seeing. My confidence in our ability to continue to expand profitability is founded in the fact that we've demonstrated it for the last eight quarters, and it happened the way we expected it to.
Speaker Change #104: Invest in Sets and Inventory.
Speaker Change #104: and and what you need next year. And so ultimately, we've got a lot of adjusted EBITDA that ultimately funds the working capital needs.
Speaker Change #104: of the business in 2025, and so my confidence in achieving cash flow was a function of my confidence.
Speaker Change #113: in the top line growth, which is.
Speaker Change #104: Predicated on the surge in adoption that we're seeing and the strong competitive sales reps and hiring that we're seeing My confidence in our ability to continue to expand profitability is founded in the fact that we've demonstrated it for the last
David Joshua Saxon: And I know the walk forward is consistent with the way we've built the company. And so that's the confidence that I have. And then, you know, also knowing that we have.
Speaker Change #104: you know, eight quarters, and it's happened in the way we expected it to. And I know the walk forward is consistent with the way we've built the company. So that's the confidence that I have. Also knowing that we have
Todd Koning: We have invested significantly this year in sets and inventory. You also get a bit of a tailwind next year due to the higher utilization of those assets next year, meaning you don't have to buy as much to meet your revenue target. So ultimately, that's how I sit here and feel comfortable with 2020.
Speaker Change #104: We have invested significantly this year in sets and inventory. You also get a bit of a tailwind next year in the...
Speaker Change #104: in the higher utilization of those assets next year, meaning you don't have to buy as much to meet your revenue target. So ultimately, that's how I sit here and feel comfortable with 2025.
David Joshua Saxon: Okay, great. So if I could just quickly summarize, so even if these dynamics don't improve, maybe they do, but even if they don't, you guys have confidence in the top line growth, and that'll drive profitability, which drives free cash flows to break even next year. And then maybe just confirm that that was a good summary.
Speaker Change #117: Okay, great. So, if I could just quickly summarize. So, even if these dynamics don't improve, maybe they do, but even if they don't,
Speaker Change #116: You guys have confidence in the top line growth and that'll drive profitability, which drives free cash flows to break even next year. Still looks achievable. And then maybe just confirm that that was a good summary. And then my follow-up, you kind of walked into the 70 million you kind of talked through for 2025. I mean, should we...
David Joshua Saxon: And then my follow-up question, you kind of walked into the 70 million, you kind of talked through for 2025. I mean, should we kind of be thinking of that as, you know, light slash early guidance? Or is that just an illustration?
Speaker Change #118: Can you kind of be thinking of that as, you know, light slash early guidance or is that just an illustration?
Todd Koning: Thanks so much. Well, yeah, so I can confirm your understanding and, and the math I walked through. I think it's consistent with our long-range plan expectations. I think consensus is about 66 million based on those numbers.
Speaker Change #121: Thanks so much. Well, yeah, so I can confirm your understanding, and the math I walked through, I think it's consistent with our long-range plan expectations. I think consensus is like 66 million based on those numbers, so I feel like that's a reasonable place to be.
Speaker Change #123: Okay, great. Thanks so much. We're not giving guidance at this point, but I think the logic and we've laid out the framework in the long-range plan and you're applying that framework, so.
Todd Koning: So I feel like that's, that's a reasonable place to be. Okay, great. Thanks so much.
Speaker Change #121: Yep. Okay, great. Thank you.
David Joshua Saxon: We're not giving guidance at this point, but I think the logic and we've laid out the framework in the long-range plan, and you're applying that framework. Yeah. Okay, great.
Speaker Change #118: All right, our next question comes from Jason Wittes with Roth Capital. Please go ahead.
Jason Hart Wittes: Thank you. All right, our next question comes from Jason Wittes with Roth Capital. Please go ahead.
Jason Hart Wittes: Hi, thanks for taking the questions. So, congratulations on the launch of EOS Insight. I assume that's going to have a lot of relevance in deformity.
Jason Hart Wittes: Hi, thanks for taking the questions. So congratulations on the launch of EOS Insight. I assume that's going to have a lot of relevance in deformity, and I'm curious about where Uniformity Business is right now. And, you know, what else should we expect from the launch? Or do you think you're fully prepared to go after that segment as with the EOS Insight launch? Yeah, it's a, it's kind of a strategic question.
Jason Hart Wittes: And I'm curious, kind of, where are you to form your businesses right now, and, you know, what else should we expect from the launch, or do you think you're fully prepared to go after that segment, as with the EOS Insight launch?
Patrick S. Miles: It's, you know, one of the things that's very apparent is that alignment in measures is relevant in short segment as well as long segment surgery. Clearly, when you think of deformity, you think of long segment surgery, our relevance there has been muted. You know, we've been just, I would tell you, somewhat, when you create a company that was broken from nothing to something, you go to the place that, you know, in essence, reflects the most immediate influence. And that was lateral surgery.
Speaker Change #115: Yeah, it's kind of the strategic question. It's, you know, one of the things that's very apparent is that alignment and measures are relevant in short segment as well as long segment surgery.
Speaker Change #122: Clearly, when you think of deformity, you think of long segment surgery.
Speaker Change #104: [inaudible]
Patrick S. Miles: And so our ability to apply lateral in relatively short segment surgery was kind of the initial kickoff of the company that's driven much of the growth. We've used that growth, in essence, to continue to expand the complexity of tools that ultimately accommodate the lateral approach but also say, gosh, how do we become a relevant participant in deformity? And candidly, there hasn't been a ton of innovation in deformity.
Speaker Change #104: and that was lateral surgery and so our ability to apply lateral in relatively short segment surgery was kind of the kind of initial kickoff of the company that's driven much of the growth we've used that that growth in essence to to continue to expand the complexity of tools that ultimately accommodate the lateral approach but also say gosh how do we become a relevant participant in deformity
Patrick S. Miles: And, and, you know, the opportunity that we have in terms of bringing a relative innovation package to deformity is very apparent. And so I think that EOS as an entree into our adult deformity and, subsequently, our idiopathic deformity and then early onset is such the right walk. And so right now, we have kind of the automated alignment measures.
Speaker Change #104: And candidly, there hasn't been a ton of innovation in deformity. And, you know, the opportunity that we have in terms of bringing a
Speaker Change #104: Relative Innovation Package.
Speaker Change #104: to deformity is very apparent. And so I think that EOS as an entree into our adult deformity and subsequently our idiopathic deformity, and then
Speaker Change #104: early onset is such the right walk. And so right now we have kind of the automated alignment measures.
Jason Hart Wittes: Next year, Q225, we're sprinting at a bone quality measure using the same image acquisition as the automated alignment measures. And so, again, I think that these things give us a very relevant informatic package that will drive a relevant research agenda in deformity. And in terms of just hardware in general, do you think you have a full offering to put out in the field at this point, or is it lacking in some places? Yeah, I would say in terms of adult and idiopathic, I would say we have a great offering.
Speaker Change #104: Next year, Q225, we're sprinting at a bone quality measure through the same image acquisition as the automated alignment measures. And so again, I think that these things give us a very relevant informatic package that will drive a relevant in-deformity surgery.
Speaker Change #127: And in terms of just hardware in general, do you think you have a full offering to put out in the field at this point, or is it lacking in some places?
Jason Hart Wittes: Really, we're in the very, very early phases of some of the small staff. So what milestones should we be looking for to see, you know, how you're progressing with deformity? Because it obviously seems like it's going to double the revenue opportunity for the company.
Speaker Change #120: Yeah, I would say in terms of adult and idiopathic, I would say we have a great offering. Really, we're in the very, very early phases of some of the small stature stuff.
Speaker Change #125: So, what milestones should we be looking for to see, you know, how you're progressing with deformity? Because it's obviously a pretty... It seems like it's going to double the revenue opportunity for the company.
Jason Hart Wittes: Yeah, I really, you know, what we've modeled is kind of the growth of the company requisite to the technological advancement of the field. And so I think that, you know, the route to a billion requires, you know, 20%, or more growth, and I think that it's contemplated in that number. Unknown Speaker So, and I mean, is this sort of you're just launching now? I assume this is a multi-year process to really start to see, you know, I guess real numbers are starting to be posted there.
Speaker Change #129: Yeah, I, you know, really, you know, what, what, what we've modeled is kind of the growth of the company requisite to the technological advancement of the field. And so I think that, you know, the route to a billion requires, you know, 20% or north growth. And I think that it's contemplated in that, in that number.
Speaker Change #126: So, and I mean, is this sort of, you're just launching now, I assume this is a multi-year process.
Jason Hart Wittes: So I know you've given, you know, you've kind of given two or three years out at this point, I guess it's about a two and a half year. Your outlook, does that have much deformity in it? Or is that pretty much all prefaced on? Unknown Speaker The current state of business. Yeah, it has a growing reflection of deformity in it.
Speaker Change #124: to really start to see, you know, I guess real numbers starting to be posted there. So I know you've given, you know, you've kind of given two or three, at this point I guess it's about a two and a half year outlook. Does that have much deformity in it or is that pretty much all prefaced on?
Patrick S. Miles: But this, you know, you know, it's interesting. I think that if anybody questions our long-term commitment to this field, I think, you know, EOS is a proxy for a long-term commitment. And I think that where spine surgery needs to go, it clearly needs to evolve, you know, the revision rates are clearly way too high. And so, as we mitigate variables through informatic tools, it improves surgery, and it'll, it'll expand our footprint.
Speaker Change #124: The current state of business.
Speaker Change #133: Yeah, it has a growing reflection of deformity in it, but this is, you know...
Speaker Change #131: You know, it's interesting, I think that if anybody questions our long-term commitment to this field, I think, you know, EOS is a proxy for a long-term commitment.
Speaker Change #124: And I think that where spine surgery needs to go, it clearly needs to evolve. You know, the revision rates are clearly way too high. And so, as we mitigate variables through informatic tools...
Speaker Change #124: It improves surgery and it'll it'll expand our footprint and so what we've done is we've contemplated that through the growth profile of the company and so
Speaker Change #124: This is a multi-year walk, and...
Speaker Change #124: and a opportunity that is, again, unique to us because we've been willing to commit the effort, the resources, and the work to innovating in this space.
Patrick S. Miles: And so what we've done is we've contemplated that through the growth profile of the company. And so this is this is a multi-year journey and, and, and an opportunity that is, again, unique to us because we've been willing to commit the effort, the resources, and, and, and the work to innovating in this space. Great. I'll jump back in the queue. Thanks a lot. All right, our last question comes from Sean Lee with HC Wainwright. Please go ahead.
Speaker Change #124: All right, our last question comes from Sean Lee with HC Wainwright. Please go ahead.
Sean Lee: Hey, good afternoon, guys. And thanks for taking my questions. I just have two quick ones.
Sean Lee: Good afternoon, guys, and thanks for taking my questions. I just have two quick ones. One for EOS Insight and the move towards deformity. Do you feel that Cummings' goal is more towards
Sean Lee: One for EOS Insight and the move towards deformity. Do you feel the company's goal is more towards getting enrolled with existing deformity surgeons or converting surgeons who don't do deformity yet into doing deformity surgery? And if it's the latter, have you seen any examples so far?
Sean Lee: Are you getting involved with existing deformity surgeons or converting surgeons who don't do deformity yet into doing deformity surgery? And if it's the latter, have you seen any examples so far?
Patrick S. Miles: Yeah, I would say that we're early in the experience, just in terms of the way that the spine community evolves. I think there's going to be a focal assembly of surgeons who do the most complex deformity surgeries. And so I think that we're focusing on the young surgeons that are very technically and technology savvy that are coming out of deformity programs. And so I would tell you that that's a big part of our efforts and focus, as well as I think the kind of historically famous deformity surgeons have always been hugely pro EOS.
Speaker Change #130: Yeah, I would say that we're early in the experience. Just in terms of the way that the spine community evolves, I think there's going to be a focal assembly of surgeons who do the most complex of deformity surgery.
Speaker Change #130: And so I think that we're focusing on the young surgeons that are very technically and technology savvy.
Speaker Change #130: that are coming out of deformity programs. And so I would tell you that
Speaker Change #130: That's a big part of our efforts and focus, as well as, I think, the kind of the historically famous people. Thank you. Thank you.
Speaker Change #130: deformity surgeons have always been hugely pro-EOS.
Patrick S. Miles: And candidly, they've been extraordinarily supportive of us acquiring it because they know that we're committed to evolving the information package. And so I would say that my presumption is that what's going to happen is there's just going to be a narrowing of the volume of surgeons who ultimately take on the majority of the deformity, and those people will be extraordinarily relevant to our focus and efforts. I see, that's very
Speaker Change #137: And candidly, they've been extraordinarily supportive of us acquiring it because they know that we're committed to evolving the information package.
Speaker Change #130: I would say that my presumption is that what's going to happen is there's just going to be a narrowing of the volume of surges who ultimately take on the majority of the deformity and those people will be extraordinarily relevant to our focus and efforts.
Sean Lee: My second question is on, I think Tom mentioned that there was a supply shortage of one of your biologics. I was wondering whether that's just a one-off event or do you see a trend of biologics becoming a more material contributor to your overall portfolio? Thanks, that's all my questions.
Speaker Change #134: I see that's very helpful. My second question is on, I think Tom mentioned that there was a supply shortage with one of your biologics. I was wondering whether that's just a one-off event or do you see a trend of biologics becoming a more material contributor to your overall portfolio? Thanks, that's all my questions.
Todd Koning: Thanks, Sean. I think, as you know, biologics has been an area of growth for us really probably over the last, certainly the last 12, maybe the last 18 months. And so, as we've continued to grow and, and, and drive a higher attach rate, we just outgrew our supply. And so, at the end of the day, it was a demand-created situation for us, which we would now record have now addressed. I wouldn't say that that's a trend per se, but clearly, biologics has been a big growth driver for us over the last certain last 12 weeks.
Sean Lee: Thanks, Sean.
Speaker Change #136: I think as you know, biologics has been an area of growth for us really probably over the last, you know,
Speaker Change #135: Unknown Speaker Certainly the last 12, maybe the last 18 months. And so as we've continued to grow and drive a higher attach rate, we just outgrew our supply. And so at the end of the day, it was a demand created situation for us, which we've now recognized.
Speaker Change #138: He's now addressed himself.
Speaker Change #135: I wouldn't say that that's a trend per se, but clearly biologics has been a big growth driver for us over the last, certain last 12 to 18 months.
Sean Lee: Thanks for the clarification. All right, I will now turn the call back over to Pat Miles for closing remarks. Thanks, Danica. I greatly appreciate everybody's support. And I hope you share my enthusiasm over the whole EOS Insight launch. It is a significant one and one that we'll look back on with great pride. So anyway, I appreciate everybody's interest. I look forward to catching up. Thanks. Ladies and gentlemen, that concludes today's call. Thank you all for joining me. You may now disconnect. Please wait; the conference will begin shortly.
Sean Lee: Alright, I will now turn the call back over to Pat Miles for closing remarks.
Patrick S. Miles: Thanks Danica. Greatly appreciate everybody's support and I hope shared enthusiasm over the whole EOS Insight launch. It is a it is a significant one and one that we'll look back on with great pride. So anyway, appreciate everybody's interest. Look forward to catching up. Thanks.
Speaker Change #132: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.