Q3 2024 Alphatec Holdings Inc Earnings Call
Speaker Change: Good afternoon everyone and welcome to the webcast of ATX A 3rd quarter financial results.
Speaker Change: We would like to remind everyone that participants on the call will make forward looking statements.
Speaker Change: These statements are based on current expectations and are subject to uncertainties that could cost actual results to differ materialy.
Speaker Change: This uncertainty is our detailed endocoments filed regularly with SEC.
Speaker Change: During this call, you may hear the company refer to NANGAP or adjusted measures.
Speaker Change: Reconciliation of NANDUP measures to U.S. cap can be found in the Supplemental Financial Babels, included in today's press release.
Speaker Change: which identify and quantify all excluded items and provide management view of why this information is useful to investors.
Speaker Change: leading to these calls will be apex chairman and CEO, Todd Miles and CFO Todd Coney. And now I will turn to call over to the byt Miles.
Todd Miles: Thank you Kathleen. So really a great two-three. So super excited about what's going on here. We've all grown every one of the spine business again by at least two X.
Todd Miles: I'm expecting more and our focus is on perpetuating profitable growth. And so just a couple of stats from a two three highlight perspectives, 151 million dollars in total revenue, which is 20% growth.
Todd Miles: 30% surgical revenue growth. Excited about that. There's a lot of volume. So 20% surgical volume, 9%.
Todd Miles: and Groath in Revenue Purper Seagre.
Todd Miles: 19% in new surgeon users. So that's back up and good. Increase our, we did over 200 surgeon training engagements.
Todd Miles: He was insight as launched and we have a record number of orders here today.
Todd Miles: The profitability is good at 7.4 million in the dress that I've got.
Todd Miles: and greater than 50% sequential reduction in cash burn, so we're on track the generate cash in Q424 and we increased our turn-long to vastly by 50 million dollars. So that's helpful.
Todd Miles: Our value creation in cast generation is really the focus of what we're doing. And the spine focused company, creating value clearly is our intention.
Todd Miles: and so we're accomplishing this through multiple means and the first one is and I think that no big questions are capacity to do this because we've done it for five straight years, which is really lead in revenue generation.
Todd Miles: And so by leading in revenue generation and increasing profitability clearly it will reflect in cash flow. And so what I want to do is provide you why we are so confident in this walk. And so as it relates to revenue as I said, it's been five years of growth at multiples of...
Todd Miles: of anybody in the spine industry. Three years of organic growth rate of an $100 million.
Todd Miles: Our procedural strategy is absolutely the right one in its driving industry high ASBs, 20% surgical volume, 19% new surgeon grows. So that's being well accepted. Our Salesforce continues to expand rapidly.
Todd Miles: We have record eos orders here today and what that does is lay the foundation for a future growth. So can't be more excited about that. 25% growth guidance in 24 with 27% growth in 23 and 26% year to date.
Todd Miles: I would say that no one feels better about the perpetuating revenue gross leadership that we have taken on over the last five years.
I think the focus and increasing profitability is hugely important.
Todd Miles: The third consecutive quarter of flat operating expenses, second consecutive quarter of a just an e-bath deposit greater than expectation, 10% of just an e-bath margin implied for Q424.
Speaker Change: When you start to think about what levers you can pull to impact profitability.
Improving efficiency of asset and inventory is a big one. This is a people and a set of instrument business. And so we are, when you look at kind of the, kind of the, a quote we're taking on the people side, we're taking a very focal effort in people investment.
Todd Miles: So if you're a sales guy or you're a product development guy, we like your chances in terms of joining the family. We're keeping a very focused effort with regard to hiring.
As of late, we've strategically narrowed our organizational structure. We have to be lean and mean and what we're doing is making sure that we streamline the organization. We are closer now to the end user as we have ever been and we are aiming to keep it that way.
Todd Miles: We have an infrastructure in place with all of our facilities who ultimately scale this business. And that was the intention from the beginning. We are positioned with sets of inventory to fuel expansive growth. We have a lot of sets of inventory to grow into.
Speaker Change: All right, just to be EBITDA on 2424, we'll continue to contribute and our sustain and selection of positive tests will be getting in 2, 2, 2, 2, 5, we'll continue.
We love it and we love the flexibility that the $50 million expansion or existing term loan has provided us and we have great partners in great well and farm economy. We can't be more thrilled about it. I would say that we are aligned and focused on achieving our long-term financial commitments.
We said back in 23 we do a billion dollars in 27 in revenue. We'd have an adjusted EBITDA of 180 million. Our margin would be 18% in with a free cash flow of 65 million.
Speaker Change: Nothing has changed with regard to our grateful Phil RLP, we're on our way. Let me turn over to Todd to provide you some financial detail.
Thank you Pat and good afternoon everyone. We appreciate you joining us today. I'll begin with revenue. Third quarter total revenue was $151 million, up 27% compared to the prior year.
and up 4% sequentially. The 151 million in revenue was comprised of 135 million in surgical revenue and 15 million dollars of eels revenue.
Third quarter, cervical revenue of $135 million increased $32 million. 30% growth over the prior year.
Speaker Change: Procedural volume growth is 20% reflection of strong surge in adoption and utilization.
We saw strong contributions across the portfolio, particularly in our lateral and explainable implant technologies, which contributed to the 9% growth and average revenue per procedure.
Third quarter results through 5 million sequentially as we benefit from the increase, product availability and new territory additions.
EOS revenue in the third quarter was 15 million, up 7% compared to last year. Notably, our year-to-date EOS order volume has been the strongest we've ever seen, which is encouraging for Q4 and 2025.
Speaker Change: Next I'll turn the results from a remainder of the P&L. Third quarter, non-gap growth margin was 69% down 60 basis points compared to the prior year to the impact of product mix.
Third quarter non-gap R&D was $13 million and approximately 9% of sales compared to $13 million and 11% of sales in the prior year. We continue to invest in innovation and future growth of the business while top-line growth for 250 basis points of leverage.
Speaker Change: Non-Dap S-GNA was $100 million and approximately 67% of sales.
Speaker Change: in the third quarter compared to $80 million and 68% of sales in the prior year period. And improvement of 150 basis points.
Speaker Change: Now included in this period's SG&A is a step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 180 basis points year over year. So excluding that impact, SG&A improved 330 basis points, driven primarily by infrastructure leverage.
Speaker Change: Total non-GAAP operating expense amounted to $114 million and approximately 75% of sales in the third quarter, compared to 94 million and 79% of sales in the prior year period, demonstrating 390 basis points of operating leverage year over year.
Speaker Change: In the third quarter, we achieved our second consecutive quarter of positive adjusted EBITDA, which was $7.4 million, a 5% margin.
Speaker Change: That compares to a loss of $400,000 and 0% of sales in the prior year, a 530 basis point improvement.
Speaker Change: Drop-through of the year-over-year growth in revenue dollars to adjusted EBITDA was 24%. Adjusted EBITDA improvement was driven by 330 basis points of SG&A leverage and 250 basis points of R&D leverage and slightly offset by 60 basis points of gross margin impact.
The chart on the next slide depicts the deliberate, substantial profitability execution that we have demonstrated since the beginning of 2022. Adjusted EBITDA has increased from a loss of 13 million and 18% of sales to a contribution of 7 million and 5% of sales here in the third quarter of 2024, a 2300 basis point improvement.
for the last three quarters, resulting in adjusted EBITDA growth and guidance that implies Q4 adjusted EBITDA of $17 million for 10% of sales.
The considerable margin expansion that the business has produced gives us great confidence in our ability to deliver on our financial commitments and translate revenue growth into cash generation.
Speaker Change: Turning to the balance sheet, we ended the third quarter with 81 million dollars in cash. That tearing value was 538 million.
As we begin to move past the phase of intense growth investment, we reduced free cash use in the third quarter by over 50% sequentially to $21 million. That was net of approximately $30 million in cash that was directed toward inventory and instruments to support distribution expansion and new product launches.
The chart at the bottom of the slide depicts the linear progression towards cash generation as we exit 2024, with the improving cash use trend from Q1 leading to an inflection in cash generation in the fourth quarter.
The improvement from the third quarter to the fourth quarter is primarily driven by reduced instrument and inventory spend and an increase in adjusted EBITDA, partially offset the working capital.
We continue to expect cash use to range between $125 million and $135 million for the full year of 2024.
In conjunction with the financial results released today, we announced an increase in our term loan of $50 million, bringing the total term loan to $200 million.
Through this transaction, we have added another strong lending partner in Pharmacon. The key terms of the loan are the same as the original facility, bearing an interest rate of SOFR plus 5.75%, and interest-only payments until its maturity in 2028.
With this incremental capital, our pro forma cash at close is $128 million.
Upon close of the transaction, we used proceeds to pay down our revolver balance. Exiting the year, we expect to have access to cash and liquidity of $145 million, which we believe provides us with ample liquidity going into 2025 where we expect to be cash flow breakeven.
Speaker Change: I'd also like to share our thoughts for the $316 million convertible notes that mature in August 2026.
While we won't rule out doing a convert if the equity is at the right price, we expect a material improvement in EBITDA over the next few years to allow us to refinance without dilution.
As we progress towards our 2027 long-range plan financial targets, when we expect a billion dollars in revenue with 18% adjusted EBITDA margins and cash flowing, the company will have a different level of access to financing alternatives.
Turning to our increased outlook for the full year 2024, the strong surgeon adoption and large volume of surgeon training are great indicators of durable revenue growth and are a testament to our ATEC clinical distinction.
Speaker Change: We expect that to fuel total revenue growth of 25% to approximately $605 million. That includes surgical revenue growth of 28% to approximately $540 million.
and EOS revenue of approximately $65 million.
That implies surgical volume grows at a high teens rate and revenue per surgery grows at a high single-digit rate for the full year.
Speaker Change: Sales growth is powering leverage, and with the third quarter adjusted EBITDA outperformance, we are raising full-year adjusted EBITDA guidance to approximately $27 million, which equates to 640 basis points of margin expansion.
Speaker Change: That implies a 30% drop-through of the year-over-year growth in revenue dollars, a material acceleration compared to 22% drop-through in 2023.
We continue to expect cash used to range between $125 and $135 million for the full year 2024.
Our expectations for cash flow breakeven in 2025 remain unchanged. We expect a cadence next year to include seasonal cash use in the first quarter, followed by positive free cash flow in quarters two through four.
I'll close today with reinforcing how well we are positioned for growth in 2025 and why that translates the cash flow break-even.
When you look at this year, our adjusted EBITDA is expected to be $27 million. We will have invested $140 million in CapEx and inventory and $17 million in interest and other working capital.
In 2025, our expectation is that we will have $75 million of adjusted DBDOT, consistent with our long-range plan assumption.
Because we come into the year with an asset base from the 2024 investment that will support 2025 revenue growth, the required investment in Satsan Inventory in 2025 is $50 million.
We will also expect to see a step up in interest on the working capital to $25 million. That all adds up to a cash flow break-even year.
We recognize that execution on cash generation is crucial to rebuilding shareholder value. As such, we are focused on growing revenue and expanding profitability to generate cash, which has informed how we are directing investments.
and the realignment of internal resources.
Those efforts are complete and strengthen our position as we progress towards cash generation.
Our organization has a lot of work to do and a lot to be excited about. As we seek to rebuild shareholder value, know that this leadership team is confidently aligned. We know what needs to be prioritized and the work is underway. With that, I'll turn the call back over to Pat.
Thanks, Todd. Our best is yet to come. We are actually focused on value-creating long-term objectives.
Speaker Change: and our objectives are bettering this environment, so creating clinical distinction. That means distinguishing A-TECH through procedures and informatics. I think we're well on our way on that front.
Also, compelling surgeon adoption, earning surgeon users by improving surgery. There's a lot to do in the spine business and we're thrilled about engaging to do it. And then expand and elevate our sales force, strengthening sales teams and enhancing our operations.
Clearly we know something that others don't. So, I love this picture. It's from the most recent North American Spine Society meeting.
At this time about, not even about, exactly five years ago, Dr. Pimenta presented PTP, our prone trans psoas approach.
to an empty room. This year his PTP demonstration was standing room only.
So we are thousands of surgeries into the experience and continue to apply our learnings.
We know we are still early in the early phase of our lateral reconstructive spine surgery journey with a heck of a lot of opportunity forward.
Speaker Change: So.
But by looking at this picture and appreciating our historical performance, it would be a great mistake to not realize our following in lateral approach surgery. So, as always, plenty of work to do, but I think that this is indicative of who we are and how we're further distancing ATEC in lateral.
feature set of SafeOp.
as well as increasing predictability and alignment with Eos. So we're attracting new users with our informatic platform and expanding applications and utility across the board. That means more users and more reasons to utilize.
I think you can see in the right-hand side the opportunity to increase complexity with things like corpectomy.
Speaker Change: multi-level deformity. There's a lot going on with regard to lateral and I think there's every reason to be profoundly confident in our perpetuating growth profile.
It is the growth segment and it is the most coveted piece of thoracolumbar spine in the business. And so, when you think about our growing business in lateral, much like mass, SRS was also standing in one of those.
SRS is the most influential society in the treatment of spine deformity. There was palpable enthusiasm for prospective deformity influence with AI-informed EOS Insight.
I would tell you it was the bell of the ball. So ATEC has the only AI-informed automated tool that is an adjunct to clinical decision-making.
Speaker Change: We talk about variable mitigation incessantly and this tool is absolutely foundational to that.
Speaker Change: It's reflected in our implant.
Speaker Change: And so it's not lost on us that these decision-making tools ultimately get driven through implant utility and can't be more excited about that. So with the launch of Eos Insight, it literally turns the most coveted image in spine surgery into information.
Speaker Change: The early sites are very enthusiastic about the experience and screens of another unique technology that provides valuable information that drives improved surgery.
Speaker Change: Everything from the pre-op auto alignment tool that happens in virtual real-time to the opportunity to create a 3D surgical planning effort to patient specific implants.
to the interoperative ability to reconcile what the plan is.
to the objective data reflected in the post-op sequence.
And so, we love this tool. We cannot be more excited about where we are today. It's the reflection of future growth. Like Dr. Lockheed says, EOS Insights streamlines our workflow and enhances our ability to track outcomes.
Everything is automated. The reason that outcomes have not been consistently captured in spine surgery is because it wasn't automated. All these things are automated. And as he says, it ultimately improves patient care.
totally excited about what's going on there.
Speaker Change: We continue to compel surgeon adoption reflected in a 19% growth in surgeon users with over 200 surgeons trained. Clearly people want to come into the company.
One of the things that we're doing is we're improving on focusing on yield.
The more surgeons come in, the more users we can create, and the better yield that can have, the more business will impact by doing so. So, we are committed to continuing to drive clinical predictability through improved training.
So, when you look at a proxy for continued growth, this is one of them, and training and education has been a hallmark of what we believe in terms of preparing surgeons for application of our clinical distinction, which, again, will continue to power our growth leadership.
Moving on to the sales force, it's another source of significant confidence.
we're completely confident in the growth leadership based upon not only the people who are there today but the people who are forthcoming. And so when you start to look at the demographics of our sales
Speaker Change: You start to say, lateral as a percentage of business for our top 10 agencies is 30%.
I will tell you, you want that mix. It's a protectable mix based upon the suite of technology that we have. That compares to 13% of our U.S. lateral share, so clearly there's a head start with the people who are performing best.
We have a 25 percent growth rate in established territories. Again, that suggests a lot of momentum with people who have been with us for a little while.
And then in certain markets where we call benchmark territories, we have a 25% market share. That compares to a 5% in most places.
It does nothing but reek of a forward growth profile that, again, we have been completely consistent on for five years.
And so, our confidence is perpetuated by robust growth in established territories and the whole leading of, with lateral, ramping in new major, or in major new U.S. territories.
Bringing new people on. They're starting to contribute. Putting 2024 set in inventory investments to work. We've got a ton of inventory in 2024. It's being put to work in the way that we intended.
Improving efficiency of set and inventory utility. We know this business that I said is people and it's sets and inventory. You've got to be efficient with your sets and inventory and we're doing that. And aligning sales incentive with operational requirements.
Speaker Change: We recently had an agent meeting. I don't think we've ever been more aligned with regard to our sprint forward. And so completely excited about our alignment.
Speaker Change: And then strong talent funnel to further U.S. footprint expansion and elevation. So there's a lot of good people out there and a lot of people that we want to attract to this business and we can't be more excited about the prospective growth profile and business profile of APEC.
The undeniable truth is that spine needs A-TECH. When you start to look at the revision rates associated with our field, people that increment in this business don't make any difference in this business. We're going at this in an aggressive way, and it needs to be going after in an aggressive way because spine surgery needs to be improved, and we're doing that.
We're going to go from a 5% market shareholder to a low double-digit in the coming years and just cannot be more bullish as it relates to what we're creating. And so with that I will turn it over and take questions.
We will now open the floor up for questions. In consideration of others, please limit yourself to one question.
And your first question comes from the line of Brooks O'Neill from Lake Street Capital Markets. Your line is now open.
Thank you very much and congratulations on a terrific quarter guys. I have one question for you and that is...
Appreciate your enthusiasm, appreciate your track record, but investors still seem to believe you're going to outspend your resources.
Speaker Change: How can you convince us that that is not going to happen?
Speaker Change: Yeah, let me start and then I'll let I'll let Todd jump in and so.
You know, the one thing that I will tell you is.
Speaker Change: We are committed to building a monstrosity, and to build a monstrosity, you have to be self-funding.
Speaker Change: And when we start to demonstrate, you know, consecutive quarters of flat operating expenses, when we start to talk about adjusted EBITDA above expectations.
When we start to talk about a break even next year. And I gotta tell you, we're taking the internal moves necessary to make sure that we're streamlining the organization. If people and sets and inventory are the spend profile of these companies, we're narrowing the spend profile associated with people. We've done that internally. We've made challenging moves. We're getting closer to the business.
Speaker Change: but also as it relates to the efficient utility of the assets. We've made a ton of progress in that realm and so when I start to think about leverage those are the areas that I think about and I see this stuff happening in real time and it provides me significant confidence.
And Brooks, I would add to that, I think clearly this is a business of growth, that growth is generating incremental profitability through adjusted EBITDA.
And as we think about the actions we've recently taken to ultimately narrow the organization, we also have done a significant deep dive in the operation to really root out
Speaker Change: discretionary spending and to really ultimately reduce our overall spend in that area as well and so I think we're being very thoughtful and very
and overall reducing that resource consumption today. As you think about next year, and I think that is...
probably two, two and a half years. It's been a deliberate walk of expanding EBITDA margins over that time period.
And that has happened as a result of the way that we've built the company. And that gives us confidence that we can ultimately continue to expand those profit margins into 2025 and beyond.
And the second component, so I think that's the profitability piece, the second component of where our investments go is in the sets and inventory.
And I guess we laid out on the call, we made a significant investment in sets and inventory in 2024, and there are a level of inventory and sets that exist today that will contribute to 2025's growth.
And therefore, the required amount of investment in sets and inventory in 2025.
is, as we've described it, in the order of magnitude of $50 million. And so when you think about cash flow, you think about about $75 million of adjusted EBITDA.
Speaker Change: spending about 50 million dollars on sets and inventory and then a step up of about 25 million dollars of investment in additional working capital and interest. That really gets you to break even and I think that ultimately is where our confidence comes from.
And then going into next year with a further enhanced balance sheet, that also just gives you more and more confidence that we can run the play that we've outlined.
Perfect. Thank you very much and again congratulations on a terrific quarter.
Speaker Change: Thank you, Bruce.
Your next question comes from the line of Matthew Blackman of Stifel. Please go ahead.
Good afternoon everybody. Can you hear me okay?
Speaker Change: We got you.
Okay, maybe Todd, if I could start with you, just a couple of housekeeping questions.
Matthew Blackman: And we're asking this to everybody this quarter, so not saving it specifically for you, but anything notable in terms of hurricane exposure, and we've also been hearing some anecdotes of institutions delaying elective procedures due to the ID solution shortages, so just
You know, I appreciate any impact from both would be transient, but are you or what are you hearing from the field, if anything? And is there anything baked into the implied 4Q guidance as a headwind? And then I've got one follow-up.
as a base case and so I think that's from a hurricane standpoint and really no impact we're seeing on the IV side and you know maybe Pat you can get your perspective on elective surgeries and spine surgery and how that's probably less elective than maybe people think. Yeah, no impact.
Speaker Change: No, I appreciate that.
Speaker Change: I think the deductible from now on also works in everybody's favor here. Amazingly.
Yeah, okay, I got it. And then my follow-up.
Maybe hoping you could put a little bit finer point.
on where sort of new wrap, new distributor productivity is today. You gave us a lot of...
Speaker Change: you know, great stuff in the slides, but is there a way to frame it?
And I guess, you know, the other question is, it sounds like it, but I just want to make sure that the new folks are sort of at full fighting weight in terms of their ability to access SETS, but also, you know, the broadest range of implants. Thank you.
Speaker Change: Yeah, let me give it a little bit of the subjectivity, and if Todd has objectivity, he can add.
It's fascinating. We actually have the inventory available to them.
You know, these are always ramps.
And what happens is you walk away from one group who has been there, that wasn't very good, that wasn't going to scale the business as you intend, and you enter a new group.
And then so you walk away from all that business, and then you jump into new business, and it's not like it all comes on day one. And so what we're seeing is we're putting together the sales force that we intend, and I still believe it to be a very effective sales force, effective in pockets, and we have geographies that are mature, that are reflective of the growth profile of the company, and then we have others that are just getting going. And so what keeps me very, very bullish is the same store sales continue to ramp up the way that we intend, and it hasn't even taken into account the new areas that ultimately are starting to ramp.
Speaker Change: And the ramp is mushy, right? It's like, you lose the revenue on the previous distributor or the previous little group if we had a group there, and then you start to grow the bill. You get access to the hospital.
And one of the things I've always said, and I know that people hate to hear this, but so this is such a
12 to 18 to 24 month business, which is you make these investments in people and the reality is they don't get reflected for 18 to 24 months. And so the reality is is we're seeing continued perpetuation of same-store.
And we're starting to see the engagement of many of the new guys.
Speaker Change: continuously for the last...
Six years, however long we've been doing this.
And so we're seeing the investments we've made over the last 12 to 18 months.
I think one good example of that is just the $5 million sequential step-up, Q2 to Q3. Clearly some of that was product contribution, but also some of that was the reflection of those investments beginning to ramp in a major way, and so I think that's a good proof point for the effectiveness of the investment in those territories.
Yeah, Matt, just to add something too, I just think it is relevant is...
You know, somebody will come on and they will have a non-compete. Either they will sit out or will do something whereby, you know, they operate in a different territory.
So, you know, it's everything from
somebody coming on, having a non-compete, serving a non-compete, entering into a different geography that first 12 months, and then coming off a non-compete.
and we only see a little bit of a boost after that. And so it's one of these things where there's so many puts and takes to these things, like it's tough to provide you the exact, because again, there's a lot of different ins and outs as we continue to evolve the business.
No, I appreciate that, but I guess the point is, is that, you know, we're ramping up that productivity curve and we still have a ways to go.
We still have a ways to go. We're a nominal player in this business. You know, there's 95% to go. You know, we're a 5% market shareholder.
a secret to the to the industry that there's a lot going on here with regard to evolving care and people want to be associated.
Speaker Change: Thank you so much.
Your next question comes from the line of Matt Miksic from Barclays. Please go ahead.
Hey, thanks so much and congrats on a really great quarter. Nice to see you kind of turning the corner here in terms of cash use.
and continued growth. One question that I wanted to ask Jeff had is one that I get...
Sometimes, often, I think it's part of the Alphatech story is folks look at what's happening with robots, look at where your robot is in the pipeline, and ask the question, why isn't competing with a robot?
Speaker Change: today in a more of a challenge, you know. Maybe if you could talk about, you know, your growth drivers today and how the how the robot and imaging kind of dovetails with that as you get into the 12, 18, 24 month period and then I have one follow-up.
Yeah, thanks Matt. I love this question just because it's, it's a, our intention is to have a profound influence on spine care. And if you were to prioritize the challenges and the variables that influence spine care, placing screws would not be at the top.
And at this point, the robot...
It helps play screws.
which again I think is fantastic and fantastic enough for us to spend 50 million dollars on a tool that ultimately will do that.
And help do that. And so, you know, what I think is is hugely valuable is an information piece that says, hey, the highest likelihood for a patient to get better from this type of intervention is.
is this pathology and be able to create correlatives that drive decision-making and behavior by surgeons. And so I think that that's at the top of the list and that was the rationale behind the EOS. And what happens is it becomes the foundation of an ecosystem that ultimately drives better decision-making.
Within the context of the intervention is the opportunity to improve the variables within the intervention and that's where like a robot comes in and that's where navigation comes in. And so all of our work has been how do we architect a procedure that's reflective of a step-by-step execution where we can provide interoperative information to drive predictable outcomes.
That is our strategy.
Speaker Change: monumental evolution in spine care because it needs it.
in the hands of the masses. And that's where it's like, again, we love robotics. We love navigation. We're in the process of integrating it. We're doing cases today, literally, with our robotic tool. But the reality of it is, it's the assembly of tools that ultimately is the answer to these. It's not just a single tool.
So, that would be my diatribe, and probably I didn't answer the question you intended.
Speaker Change: Yeah, no, that is helpful.
and I one follow-up maybe on the way that your way that you're guiding the way you're thinking about the the event on cash deployment how much that you've made you know in terms of
you know titrating or the level of deployments in capital and some of the inefficiencies that you had earlier in the year.
You know, I guess how you feel about that and how you feel about...
Speaker Change: You know, where in the bell curve you're sort of guiding us and what maybe you're doing a little differently in the way you're communicating and planning for Q4, Q1, and going forward.
Yes, Matt, thanks for the question.
Speaker Change: When you look at how we described our inventory challenges in the second quarter call, we really had a mixed challenge, more or less. And so the way that works its way out is, and if you remember, it was really one of timing where we had stuff.
Uh, we needed at that point.
had in the second quarter and we have today that is less efficient than it needs to be, that ultimately supports a revenue
growth number next year, meaning you don't have to buy a certain amount of sets and inventory to support some portion of next year's growth. And so, I think you look at what our expected growth rate is internally for next year. You understand what asset base you have, what asset base or what revenue base that that asset base will support, and you ultimately do the math.
and you come to the conclusion that about $50 million of investment in sets and inventory is what you need. And so I think our level of resolution and confidence in that is reasonably high given where we are in the planning cycle, knowing what investments we've made and
consequently what assets we have today and where we expect the revenue to come over the next 18 months and so
And if, you know, more specifically to Q4, and maybe the question is,
You came in at $21 million of cash use, which was favorable to what you expected in the third quarter. Your cash flow expectation is $1.25 to $1.35. Ultimately, we saw some improvement in DSOs in the third quarter, which helped us.
Speaker Change: And as we think about landing the plane in Q4 as it relates to cash flow, ultimately we're giving ourselves a little bit of room for DSOs to creep back up to maybe in that 50 range, which is still pretty good.
Speaker Change: And also, we have some incremental cash expense associated with some of the actions we've taken from an operating spend standpoint here in the third quarter or in the fourth quarter. And so that will also play itself out in the fourth quarter. So, when you take all of those things into.
into context, our view was, let's stick with 125-135 cash use on the full year, and all the things that we're doing should give us confidence that we can hit that in a good
That's great. Thanks so much.
Your next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is now open.
Great, thanks for taking the question. It's a long one, but it is one question I think we're supposed to be...
Matthew O'brien: So maybe this question is for Todd. Todd, as I look at your CapEx spending the last couple of years, and again, it's a long question, so bear with me,
20 million ish so call it a 1.6 like productivity of that capital and I know it takes time to get up the curve and all that stuff but if you know you're adding a hundred and thirty million dollars this year
And you're able to get some level of productivity that's similar to what you see here in 24.
Why wouldn't your top line in 25 be...
you know, something that's greater than $130 million of incremental revenue just based on all the investments that you've made this year. Because as I look at the street, we're only modeling things up about $120 million a year. It seems like, just based on all these investments, it should be much higher than that. Thanks.
Speaker Change: Too bad, right?
And I think we shared this in our long-range plan, you know historically that rate has been 75 cents on the dollar of growth And so if you look at the investment in inventory and sets an inventory or excuse me inventory and sets combined It takes about 75 cents to drive a dollar of growth
Speaker Change: Clearly, here in 2024, our investment level is about $140 million. And so we ultimately
Speaker Change: to support the potential for a higher revenue ramp and so we wanted to be prepared for that. Clearly we're growing at significant rates today and so when you look at the investment over the course of 2020
Speaker Change: That $140 plus $50, that actually is ultimately, if you assume a $7.25, I think that's where the street's at. If you look at that, that's about $0.80 on the growth dollar. So I think, to your point,
Our asset base
does support.
a level of revenue growth that is higher than what's implied. Ultimately, we'll look at where we are and we'll talk about guidance.
in 2025, but I think to your observation that we have invested and we have the asset base to continue to grow at meaningful rates.
Speaker Change: Great, thank you.
Your next question comes from the line of Josh Jennings of TD Cowen. Please go ahead.
Hi, this is Eric on for Josh. Thanks for taking the question.
Speaker Change: Congratulations on a strong quarter. Really strong momentum in the surge in training front with 200 plus.
Just curious about what the conversion rate is on those surgeon trainings.
Speaker Change: going to be added to the ATEC base once they're at your training center and have exposure to your technology? And then secondly, is there anything that you think can be done to possibly improve that conversion rate? Thank you.
Speaker Change: Every one of them is going to be a good customer.
Speaker Change: I'm kidding.
Speaker Change: kind of evolution of surgery and evolution, I think especially lateral. You know lateral really is kind of the place that people
you know, clearly find that, hey, how do I learn lateral and can I learn it from the guy who created it, Luis Pimenta?
at a facility. They'll go to that facility. They'll either watch a surgeon or they'll watch it online. We have some online tools. But every surgeon has a different algorithm of things that they require to ultimately be comfortable in applying that technique to a patient. And so
Speaker Change: You know, oftentimes it's different for each surgeon. So not to evade the question, but I'm not going to disclose the specific rate, but on the other side it's one of those things where everyone is different and what we're doing is tailoring each of the different experiences.
You know, part of the effort there is aligning interest, and I think it's making sure that are the right people being invited to come in, and are they people that are serious about engaging in the technique? Do we have the sales structure in place in that geography? Do we have access to the hospital? Do we have the things aligned such that we can ultimately count on someone?
Thank you.
Applying the technique if the if the comfort level is there And so those are the ways that you ultimately continue to elevate the yield associated with people coming in But it's it's a it's something that I've dealt with over the last 20 some odd years in this business or 25 years in the business And I wish that there is a predictable algorithm associated with exactly who's going to use and who's not there's just isn't
Speaker Change: Understood. Yeah, I appreciate that, Keller. Thank you.
Your next question comes from the line of Kathleen Cronin of Canaccord. Your line is now open.
Hey guys, congrats on a great quarter. I just want to turn to EOS. You noted some record orders. Are these new EOS users, or are they upgrades to the newer EOS system in order for those legacy users to use the Insight software specifically?
And also, just why keep DO's guidance the same given the strength and order volumes? Is there a lead time for these volumes that isn't really translating to the Q4? Thanks.
Speaker Change: Okay, yeah, Todd was telling me he'll take two and I'll take one. I may take both, I'm just kidding.
Can I tell you there's great enthusiasm with regard to EOS Insight and I think that people understand the translation of the technology and you know
If you saw the order book for Q3, it's outstanding. It's a who's who.
And the thing that makes me most excited is that here's this little A-TECH five years ago that, you know, couldn't buy themselves into a, you know,
Speaker Change: you know, into a meeting, and now it's like a who's who in spine surgery is buying Eosys. And so all that speaks to is our getting access to those institutions and our proliferating those institutions with our implants.
And I can't wait for the day that we are a ubiquitous player in this field, as well as what we're doing is we're taking the data from these tools and ultimately improving care.
EOS is a much more significant influence to spine care than, say, SAFOP is. And I love SAFOP. I think SAFOP is the gateway to lateral surgery. Without automated neurophysiology, especially automated SSCPs and now automated MEPs, that is a gateway to lateral surgery and beyond.
But when you start to think about the influence that the S.A.F.E. Office had on lateral surgery, I will tell you, the influence that EOS can have on deformity is profoundly bigger.
And so that, I think, is what creates all of the enthusiasm. But this is a step-by-step-by-step exercise. And so we're going to be perpetually conservative with regard to placing the units. And these are new places that we're placing units. They're not upgrades.
Speaker Change: And we continue to upgrade units, which is inspiring. But if you look at the recognition of revenue, I think we have to go into exactly why we.
It is. And I think Caitlin, the point is, is that we've been about $15 million of revenue in EOS for the last probably six or seven quarters or so. And so this Q4 actually,
Q4 EOS revenue in our guidance is an $18 million dollar
Speaker Change: Great, thanks so much.
Your next question comes from the line of David Saxon of Needham. Please go ahead.
Great, good afternoon, Pat and Todd. Thanks for taking my question. I'll just ask one quick one on valence. I know that's in kind of a
friends and family stage launch at this point. So maybe just talk about kind of early feedback you've been getting and how we should think about the cadence from, you know, going from a friends and family into a broader launch in 2025. Thanks so much.
Yeah, thanks. You know, this is one of my favorite ones. It's like, I love when you don't have to back a bus up to an OR to bring in a tool that ultimately guides your screws.
And we don't have to do that with violence, it's a.
meaning meaningfully small
And I would say that that's where we're spending most of our time. And so if I look over the time frame, our excitement is, let's continue to refine the thing through middle of next year, and then let's discern if we're ready to launch it then. That's our expectation, and that's our excitement. But I would tell you, from a footprint perspective, from a technological perspective, from a software capability perspective.
Having guys, you know, that have the type of experience who are who are putting this together You know, Brad Clayton, Kevin Friend. These guys are years into this business. There's a whole slew of software people
Speaker Change: in-house here and in-house in Colorado that have meaningful experience in this field. And so what gives me confidence is I see the improvement that we're making every day on the thing and I see the opportunity that it presents because
It is a not a huge cost of goods, comparatively speaking, not a big footprint, comparatively speaking, and so it just provides us flexibility in terms of how we get these things into the into the hospitals. And so I know not a specific response to your question, but kind of where we are today.
Speaker Change: Great, that's helpful. Thanks.
Good afternoon, guys. Thanks for taking my questions and congrats on a strong quarter.
My question is kind of a top-level one. Looking back from beginning of last year, we can see that
Speaker Change: You have been able to consistently outperform your previous guidance and now the latest revenues are more than 10% higher than what you expected you were able to achieve at the beginning of the year. So I was wondering whether this...
It's been driven by a specific tailwind and whether this upward surprise is coming from a trend that we can expect to continue going into next year. Thanks.
Also I think when you look at when you look at the guidance we put out
at the beginning of the year, and that was $595 million.
Speaker Change: Ultimately, that was.
Where we're looking at today in terms of our guidance and the improvement and the increase in it, it's really all come from surgical revenue.
our EOS guide has been consistent throughout the year. So you ask yourself, why is the surgical revenue done better than what we anticipated early on? And it's really come through our volume assumptions. And so.
Speaker Change: Ultimately, I think this is a reflection of the interest, the adoption of our technology and our procedures.
by surgeons and aided and advanced through the addition of sales coverage and sales reps. And so, you know, it's not just one thing, and I hate to be...
super simple about it, but ultimately this has been a greater volume experience than we got it to at the outset of the year.
I think that gives you confidence that we're on to something.
Thanks for the additional color, that's all I have.
Your next question comes from the line of Adru Ray Mary from Morgan Stanley. Please go ahead.
Hey Pat and Tom, thanks for taking the questions. I'll sneak into, they should be pretty quick, but Pat maybe on EOS, I think in your part of the slide deck you're talking about it laying the foundation for future implant growth and maybe just put a little bit more context there, especially against what that means for the record EOS orders that you're seeing with Insights. Are you embedding like volume-based commitments with kind of like every new order from EOS, whether it's an upgrade or replacement? So maybe just talk to us a little bit about that. And then Todd, just on the gross margin for the quarter, it came in a little bit weaker than we were expecting. I know you highlighted product mix, but we saw lateral kind of continue to take more shares, so just talk to us a little bit more about
Speaker Change: a little bit softer versus maybe our expectations and what you're kind of thinking about for the fourth quarter. Thanks for taking the questions.
Speaker Change: I'll start, Drew, and thanks for the question. I was worried about not doing a great job in terms of describing the integration of our implants into that experience.
And so, the beauty of automating these measures is that we get, you know, a ton of radiographs and a ton of opportunities to create plans, and those plans are informed by our implants.
And the beauty of that is we see it all the way through the...
the surgical intervention, all the way through the post-op assessment, our ability to start to see the reflection of that spine care on like the adjacent level and start to understand like what the change has been in the spine alignment.
It is profoundly valuable because ultimately it's the indicator of a future issue. And so the great part is the surgical planning element ultimately is informed with our implants. Our implants to the tune of...
Hey, here's the type of rod, patient-specific rod you need. We will bend that rod. That rod will go with our implant. And so...
When you have the early
of engagement with the surgeon on what his findings are radiographically and he sees the patient and identifies the intervention that he's going to apply, our ability to plan it and integrate our implants and understand how our implants ultimately fulfill the requisite
obligation is
really outstanding and so it really ties the implants to the plan and then we have an integrated integrated tool interoperatively to reconcile against that plan. All that is proprietary and so when we start to think about selling these units and
Speaker Change: garnering access to hospitals.
Speaker Change: Our opportunity to counter-access based upon the utility of this preoperative plan that's fundamentally driven by the AI that drives the alignment measures is outstanding. And so tying our implants is a very...
presumptive exercise in this effort. And so I think, you know, just to give you a perspective of the type of volume, like the automation is so important to ultimately garnering information and creating predictive, like a predictive measure. I think we're over a hundred thousand images in the ten sites that we had in our alpha evaluation.
And so when you start to think about the volume of information that we get through the integration of these tools that ultimately inform predictable spine surgery.
Speaker Change: It's awesome. And so anyway, that's, that's what creates all the enthusiasm. I'm sure I'm, I'm droning, but it's like, that's why you really can get a tool that is unlike anybody else has so.
And Drew, just on the product mix, our EOS margins were a bit lower, driving a little bit of a headwind there. That's just really kind of...
Speaker Change: Thank you. Thank you.
geographic mix more than anything with
The international markets being at a lower margin because many of those are distributor sales, so.
Speaker Change: That just provides a little bit of a margin drag in the quarter.
And also, as we kind of got healthy in our biologic portfolio, we saw a good, strong biologic revenue performance in the quarter that has a lower margin profile as well. So, both of those things contributed to the little bit of a headwind that we saw in the quarter and, you know, think about the second.
or excuse me, think about the fourth quarter non-GAAP gross margin in that 69.5% range. And we expect to end the year about 70% gross margin.
Speaker Change: Thanks.
Yes, sorry, I didn't make that clear.
Thanks for taking the questions.
Speaker Change: You're back, Mr.
That concludes our Q&A session. I will now turn the conference back over to Pat Miles for closing remarks.
Yeah, I just want to thank everybody for their attention and I hope you share your enthusiasm about what we're building. So thanks very much.
Thank you, everyone, for joining. You may now disconnect.