Q2 2025 Alphatec Holdings Inc Earnings Call
Good afternoon, everyone and welcome to the web gossip apex second quarter financial results, we would like to remind everyone that participants on the call we'll make forward looking statements.
Statements are based on the current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed in documents filed regularly with the S E C.
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.
<unk> identified and quantify all excluded items and provide management's views of why this information is useful to investors.
Leading today's call will be eight extra mine N C L Pat miles and CFO Todd Koning now I will now turn the call over to Pat miles. Please go ahead Sir.
Hey, Thanks, Mark really appreciate and welcome to the Q2 2025 financial results call from a tech.
There will be some forward looking statements so read that at your.
Measure so.
I would consider this a good degree at quarter end.
So Q2 2025 financial results.
The surgical revenue growth of 29%, which is about six times the market. So I would think that that is.
Leadership.
$23 million and adjusted EBITDA, which is a record for us in 13% of revenue.
880 basis points year over year so.
Which flexes in that.
$5 million and free cash flow and so the.
Profitable revenue growth leadership has.
Yes.
Continues and so.
The.
Profitable growth.
Continues at $186 million in total revenue.
The total revenue growth was 27%.
Surgical revenue growth at 29% the way we look at same store sales. So revenue growth in established territories was 29% that tells you that the demand in the areas.
Where we have established.
Distributors has continued to grow it's not just adding people.
The surgeon user growth at 21% I think speaks for itself in a day.
This suggests that were compelling adoption.
I mentioned, the $23 million adjusted EBITDA marks the fifth consecutive quarter of positive adjusted EBITDA.
It's forex improvement over last year same quarter.
Clearly well past the inflection point on profitability, we're not only leveraging infrastructure investments we've made but we're seeing the fruits of the changes implemented last year.
And around expense control, we have an infrastructure in place to support over $1 billion.
In revenue.
Yeah.
Improving EBITDA performance combined with heightened attention on asset management has produced $5 million with free cash flow. So again.
Very proud of the team and what they've done.
We have $217 million of cash and access to cash.
We are profitable from a non-GAAP net income perspective.
Our <unk> growth has made us the <unk>.
Third in our market share in the U S. So.
I would say that that's a that's a good quarter.
What I'll do is turn it over to Todd let him get into the details of alright.
Alright, well, thank you Pat and good afternoon, everybody I'll begin today with the second quarter of 2025 P&L highlights.
Total revenue was $186 million up $40 million year over year, that's 27% growth compared to the prior year of $186 million in revenue was comprised of $168 million and surgical revenue and $17 million of Es revenue or.
Our first quarter surgical revenue of $168 million grew 29% compared to the prior year period that represents $38 million in year over year growth. We saw no selling day difference year over year. As we do include good Friday get our selling day calculation because history has shown that surgical volume on that day is typically in line with other <unk>.
Our ideas.
Procedural volume growth was 28% driven by strong surgeon adoption of 21% and increased utilization of 6% surgeon adoption at this pace reflects both the attractiveness of our portfolio and the coordinated investments, we're making in sales talent to meet that demand.
Average revenue per procedure growth was 1% and that reflects the strong comp we saw from average revenue per case in the second quarter of 2024.
Our same store sales in the U S. Our sales that come from sales agents that have been in territory for a year or more grew 29% year over year, which demonstrates that we continue to grow significantly in the markets, where we're already established our strong surgeon adoption increased utilization and same store sales growth results are.
Testament to us growing both our share of wallet with existing surgeons and new surgeon adoption within territory.
We know that clinical distinction drive surgeon adoption.
In the first half of the year, we furthered our clinical distinction by expanding our procedural offerings. This includes a new cervical retractor system and unique segmental cervical plating system Carpectomy solutions for cervical and thoracic applications and meaningful new applications for safety.
We continue.
To invest in the organic innovation machine the foundation for future growth.
<unk> revenue increased $17 million in the first quarter up 11% compared to last year demand in the U S market, where we have a strong presence with our implant sales force continues to be the biggest driver of growth in both deliveries and new orders, which positions us for strong system installations, and the accompanied implant pull through in coming years.
Turning to the remainder of the P&L first quarter non-GAAP gross margin was 70% flat sequentially and down 130 basis points compared to the previous year, primarily driven by increased biologics attach rate and product mix associated with the strength in our surgical business.
non-GAAP R&D was $14 million in the second quarter up in absolute dollars, both sequentially and year over year, reflecting our continuing investment in the long term growth of the business.
non-GAAP R&D expense was approximately 8% of sales in the quarter with top line growth driving 170 basis points of leverage.
non-GAAP SG&A of $108 million was approximately 58% of sales in the second quarter.
SG&A was down $4 million sequentially and the absolute increase in SG&A year over year was driven by variable costs related to our 29% increase in surgical revenue.
The remaining non variable SG&A was down in absolute dollars year over year. These reductions in absolute dollars of SG&A spend reflect the changes we've made in how we operate the business increased emphasis on driving profitability and cash flow.
SG&A improved nearly 1100 basis points year over year with 800 basis points coming from both variable expense rate improvement and infrastructure leverage approximately 300 basis points of improvement came from leveraging the depreciation associated with our prior year instrument investments.
We reported total non-GAAP operating expense of $122 million, which was.
<unk>, 66% of sales.
Maintaining discipline as we support strategic growth initiatives, we delivered a modest 7% increase in operating expenses, while continuing to invest in the growth drivers of the business.
Those efforts along with our durable top line growth drove over 1100 basis points of expansion in operating margin year over year.
I'll turn next to adjusted EBITDA, which was $23 million or 13% of sales in the second quarter compared to $6 million and 4% of sales in the prior year period and $18 million increase this was the best performance. We've had since the start of the tech transformation.
The quarter also marks our third consecutive period with an over 40% drop through on year over year revenue growth to adjusted EBITDA, reflecting both infrastructure scalability and an improving variable selling expense profile.
You can see on the chart on this slide that the profit margin expansion that we are executing has been both significant and consistent our trailing 12 months of adjusted EBITDA now sits at $62 million.
We're driving meaningful margin expansion that aligns with our priority as outlined in our long range plan and as a result of disciplined execution. These delivered results give us great confidence in our ability to continue delivering on our financial commitments and translate revenue growth into profit and cash flow.
Turning to the balance sheet, we ended the first quarter with $157 million in cash on hand. Additionally, we had access to $60 million of available borrowing on our revolving line of credit which was undrawn at quarter end is making our total cash and available cash of $217 million.
Our positive free cash flow of $5 million was again at the favorable end of the zero to $5 million range that we previously communicated.
A record $16 million in cash generated from operating activities allowed us to continue investing in surgical instruments, while still delivering positive free cash flow and increasing our overall cash balance sequentially by $4 million.
We can clearly see the companys inflection to cash flow generation is taking shape with our trailing 12 months of cash use improving to $22 million this quarter.
This year, we are seeing the benefit of the operational improvements we've been making everything from how we plan our inventory purchases to our hiring plans to the operational standards for field assets I'm very proud of the cross functional teamwork and results. We've delivered in this area across our company execution against those goals contributed to a pause.
Positive free cash flow in the second quarter and the underlying dynamics of the business reinforce our confidence that we will be cash flow positive for the full year given.
Given the magnitude and increasing trend of EBITDA, we are generating our laser focus on managing assets efficiently and the strength of our cash position. It is clear we will not need additional financing.
Our financial outlook for this year's expects continued strong revenue growth to drive incremental profit margin expansion.
We are increasing our full year revenue guidance by $8 million to $742 million as a result of the strong Q2 performance and our surgical business our revenue outlook for the full year 'twenty five expect adoption of our unique procedural approach to drive surgical revenue of approximately $666 million.
And we expect <unk> revenue approximately $76 million.
As it relates to free cash flow, our second quarter performance further reinforces our confidence in delivering positive free cash flow for the full year 2025 with respect to the cadence of our cash flows for the remainder of 2005, we expect the third quarter free cash flow to range from a positive $1 million to positive $5 million with a four.
Quarter generating additional positive cash flow, resulting in us being cash flow positive for the full year 2025.
Turning to the outlook for the full year 2025, adjusted EBITDA, we expect sales growth to continue to leverage the infrastructure, we've built contributing to an adjusted EBITDA of $83 million.
$5 million increase versus our prior guidance of $78 million, notably our trailing 12 months of adjusted EBITDA of $62 million as of the second quarter speaks to our ability to deliver on our full year commitment of $83 million. As a reminder, our adjusted EBITDA guidance includes us absorbing the impact of expected tariffs in the second half of the year.
We continue to estimate the impact of tariffs on our cost of goods sold to be in the low single digit millions of dollars for the full year, we are off to a great start at the half year, Mark and have confidence we can deliver on our commitments in the back half of the year.
The chart on the slide depicts the consistency of the profitability progress, we are making and the tremendous power of our business model to drive future profitability.
Adjusted EBITDA guidance of $83 million will generate an adjusted EBITDA margin of 11%.
That implies a 40% drop through of the incremental growth in revenue dollars to adjusted EBITDA. This trajectory positions us well to achieve our 2027 adjusted EBITDA margin goal of 18% at $1 billion in revenue.
Now, reflecting on where our financial results are at the midway through the year I would highlight a few things first we continue to grow at five six times that of the overall market.
We've generated $62 million of adjusted EBITDA over the last 12 months and are at 13% of sales in the second quarter third.
We have our first quarter of non-GAAP net income of $3 million in fourth.
We have delivered free cash flow of $5 million this quarter.
I think it is safe to say we've passed the inflection to profitability, it's exciting to see the teams hard work paying off as we've arrived is a profitable growth company and with that I'll turn the call back to Pat. Thanks.
Thanks, Todd greatly appreciate it.
I wanted to give you some some new.
Meaningful reflection as to where the growth is coming from and why the growth is happening and I would tell you. The strategy is steadfast our execution relentless we are executing and fulfilling the commitments.
The pillars of our business are really are we doing something better clinically creating clinical distinction.
Clinical distinction does compel surgeons and we are compelling surgeon adoption I think it's reflective of the of the 21% new surgeon grows and we continue to expand and elevate.
Salesforce, so I think under the auspices of those three pillars I think a lot of good things are going on.
I want to explain a little bit.
We've made statements in the past it seems like the spine market needs.
And.
That is that is not a a boastful comment what it does is it into.
Tended to express just how unsettled the spine market is if you have 10 spine surgeons how to address the same patient you'll get 10 different answers. The reason for this is it spine is highly complex. It has wrought with a myriad of variables that underlying durability and so when you start to look at the revision ratings spine surgery versus total joints, we are going to find.
That the spine revision rates or multiples of total joints and looking at the graphic you can see total hips total hip surgery in 10 years is around 5% total knee surgery in five years is 3% and then youre getting 15, 15% to 25% to 30% in short and long segment spine shirt and so I.
Would suggest that that is a.
Is a reflection of a lot of variables that need controlling.
Historically industry's response has been more widgets or tools to increase the placement precision of the widgets and.
I would suggest that that's not enough, which is why our view is that the challenges are much more complex and the solutions require greater sophistication.
It is.
And it's really what that's what drove the design and development of our ecosystem that not only addresses intra operative challenges, but also improves care through data driven decision making.
When you.
When you look at what we've built we have built an ecosystem that's scalable for a long run. It is why we previously invested in a technology infrastructure that will fuel durable long term growth and profitability. Having previously made these investments enables us to focus our R&D efforts on magnifying the values of each individual technology.
And then integrate them into a fully comprehensive system.
So our end to end ecosystem enables influenced not only in our operative phase of spine surgery, which has historically been where spine companies. They focus but also informed preoperative decision, making as well as post operative analytics outcomes and trends. So all of this information is fed into the insights portal that uses AI and machine learning models.
To better inform decision, making and so we believe that these are profoundly important elements that drive a long term growth profile based upon the many challenges in spine surgery. So our foundational informatic investments several years ago in safety.
<unk> and Dios enable our ecosystem really come to life or the.
The process of Architected informatics and spine procedures into the very best integrated experience something else if not that's not been done in spine surgery.
Recall the goal of the spine surgery, it's decompression stabilization and alignment and providing information about the nerves is a foundation of foundational importance with safe up be it the location of the nerve health of the nerve status and <unk>. These are foundational elements of a successful <unk> experience.
Assuring precision during implant placement of stabilization with navigation robotics through valent is a piece of the pie that the whole pie, but another foundation of foundational importance as it relates to the goals of spine surgery, and then providing not only alignment parameters and tools for inter operative.
<unk> and reconciliation for which to align the spine as well as providing patient specific implants is required and so.
<unk>.
<unk> is the next piece of the puzzle will be launch I wanted to spend just a moment.
On how we will approach the market.
First and foremost <unk> as a procedure company Zealand's will be integrated directly into the step by step workflow of our proprietary spine procedures things like PTP and navigating that front of the spine anterior column with both neurophysiology from a narrow perspective and navigation.
Is is elegance and so using the robot to assistant screw placement in the back will be the first fully integrated system. What this does is it democratizes the technique to a much broader surgeon audience, who have previously been apprehensive because either they did not trained.
Just unfamiliar with lateral surgery. So we see this as another catalyst the system will have a very small footprint.
Again pick up little room in.
In the operating room.
Lastly, we will be very very aggressive in terms of how we place them and so our goal is very best integrated system possible.
<unk>.
If you look at what we're doing really what we're doing is utilizing objective measure.
It enables variable mitigation, I think where others approach industry through the proliferation of widgets, we're taking the approach of variably mitigation through objective measure.
Objectify to spine experience that means bringing measure and supplying more scientific tools to the charge and versus just relying upon surgical experience experience, where they stopped like should we ever feels by bringing objectivity, we will further the predictability and impacted the durability.
So so much needed.
A key to this strategy is automation.
We must be able to collect and translate data they will improve surgery in an automated way history has demonstrated that it won't get done until requires a manual process.
We're in the very early stages of informing our spine procedure to have data mining from our ecosystem.
So a good ways to go and show that the interest is to make sure that.
One appreciate why we say that the spine market needs.
So we appreciate the unexpectedly high revision rates and spine you have to realize that our approach to variable mitigation is resonating with customers. The numbers suggest as much as well as attracting the best salespeople and is why we say the spine market needs eight it should be it should not be a surprise that after six plus years of grid.
<unk> at multiples of the rest of the market. We're now the third largest U S. Spine plan, we have and will continue to benefit from the dislocation and disruption in the spine market. However, our ecosystem and procedural strategy will continue to fuel our outsized profitable growth.
As we've said for some time, we will continue to be rewarded by focus.
With a 100% focus on spine combined with a team that has unmatched clinical knowhow and expertise added to a perpetuating effort to create the very best sales team in the business makes a tech far and away the preferred destination.
And so I will remind you that we are just getting started our ecosystem has years to reflect in improvement and.
Ed.
Our best is truly yet to come so a quick thanks to the APEC faithful is then that's creating this juggernaut and with that we will take questions.
We will now open the floor up for questions.
Consideration of others. Please limit yourself to one question.
And the first question comes from the line of Matt <unk> with Barclays. Matt. Please go ahead.
Hey, thanks, so much.
Really appreciate you taking the question let me just congratulate you on a really strong quarter top line.
The direction of cash flow, it's really.
Encouraging an aggressive so.
Congrats.
I wanted to ask a little bit about.
Yes, Pat Youre.
Question question that I get.
As well as everything is going of course.
Well, thanks, Gerry asking for something apples, but strong as the job on it.
As robust as the lateral.
Lateral lengths from lateral has been.
On the <unk>.
<unk> technology side and sort of digital side maybe.
Maybe two.
Two parts one question, what what do you anticipate to make the robot difference when you do start to.
Put that out for folks more.
You can look at it and then also.
What kind of investments are you having to me.
Yeah.
To kind of support the integration.
As you pointed out Mike.
Turnkey front to back solution imaging to Joe automation.
The enabling technology.
Yes.
Got it.
<unk>.
Gets Arctic for me to look back on some of our original discussions.
On robotics.
And.
And it's.
Fascinating to me that.
Historically speaking I recall, when we assembled multiple products to make for a procedure. The response of the marketplace was hey, we have we have a retractor.
We have a nerve physiology patient, our E&P group and we have a implant.
Our budgeted plan.
One of the problems when you look at the unacceptably high revision rates in spine surgery is that nothing has been designed and developed put a requisite utility within a specific patient populations and because there is such a volume of variables in spine. What happens is everybody just creates generalized equipment.
I think what makes us different is the procedural architecture, a very specific application.
One of the real opportunities in navigation robotics is to integrate these elements into the workflow of a spine procedure and so it's amazing right. It's like here's us coming out with lateral surgery, and we have a tremendous run rate and the reason we have a tremendous runway because theres a unique knowhow in terms of the assembly of goods.
And I would say, it's the same thing with regard to navigation robotics I could care less about navigation robotics, what I care about is the reproducibility associated with surgical experience it requires precision.
Navigation is a tool that provides us increased precision without radiation I want to integrate that in a unbelievably elegant way and so where we see the reward in navigation robotics is in the integration of the workflow associated with the spine procedures, we are interoperable.
Cameras that are operative camera has a very unique ability we moved around during the case such that it gets the best view and there is no one standing in front of it in the operating room.
Yes.
You guys and the investment team could stand in the operating room you can appreciate the chaos.
But it is in the create an elegant workflow, where it's all about execution using all of the yield elements about how youre going to do something based upon.
Creating a surgical plan integrating that surgical plan in all elements into it such that the the.
Robotic piece becomes informed by what the plan is and understand.
Relation pedicle volume and all the other elements such that the operating <unk> just begun to execution place and so our view is is that these things just become part of procedures that ultimate get wrapped into a workflow and that what we have the opportunity to do is make the operating room something that just is all about execution not about <unk>.
Clinical data on <unk>.
<unk> clinical decision, making and so we want that to be done before the surgery starts and then we'll assess how we did after we think that that's how the ecosystem ecosystem informs better surgery.
Sorry for the diatribe, but thats great.
That's super helpful. Thank you.
Yes, Sir.
And your next question comes from the line of John Lee with Jefferies. Please go ahead.
Alright, great. Thanks for taking the question.
I guess.
To start just kind of curious.
Really strong same store growth.
Was wondering how much of the contribution from the reps add is maybe two years ago.
And how much is being helped by the availability of more instrument sets from last year's investments.
As well as some of the.
Fish's efficiency initiatives.
With these instruments.
Your realizations.
Let me start with the subjective and can give the harder Jonathan on the object.
The.
First of all that.
Half the time I think to myself.
Are we communicating the success of the internal teams thoughtfully enough network, but I would tell you we've evolved as an operational institution and you start to think about the utility of assets.
We have matured and mostly and I would.
Tip my hat to the team who is who.
Who ultimately is responsible for that effort and so I would tell you that.
The same store sales dynamic as we're compelling people in there.
Are.
You can believe it or not it's all youre going to see is continued a continued growth profile from.
Elevated sophistication in the field and we will continue to compel people.
Adding people, who are relevant and also people who buy into the surgical thesis and so.
I can't quantify it at all of the FERC pods view with regards to the increase but Thats why we love the same store sales so much because it's reflective of a demand profile. That's when we say cash flow, creating clinical distinction there becomes a proxy for compelling adoption and it's just not us popping off with regard as more and more people are doing.
And I think Theres, a couple of ways to think about it I mean clearly.
The people we brought on board over the last 12, 18, 24 months have been significant contributors to our growth.
And we know Thats true because as we say what we do today impacts results 12 to 18 to 24 months from year end and I know, it's true because I can I can see the data.
I think what's more important or the way I like to think about it is it's really about the surgeon adoption and the surgeon utilization and you sell both the utilization and surgeon adoption will be very strong in the quarter and I think that speaks to the penetration story and so that's kind of tied to pats commentary.
Same store sales being strong, but clearly we're getting greater utilization with our existing surgeon base as well, which I think we've talked a lot about is as people get comfortable with our procedures. They apply those procedures to more complex procedures, and we kind of get a greater share of wallet over time.
I think we're seeing that play out.
As it relates to our efficiency and the utilization of our instruments I mean, clearly as we've we bought forward I think that by forward certainly has enabled us to continue to lean into our growth opportunities. We continue to do that.
I think the operational sophistication that Pat speaks to has been another leg to that another.
Another degree of freedom for us to really be placing assets in instruments, where theres opportunities and then what we're doing is we're monitoring the progress of the success of those opportunities better. So that we are ensuring that we're getting the kind of utilization of the assets that we need so we've elevated our op.
Operational sophistication significantly which has continued to.
Enable our outsized growth.
We've seen.
Alright, great and very helpful. I'll, just keep it to one and congrats on taking the third share in the U S.
Thanks, Jeff.
And your next question comes from the line of Vik Chopra.
And your next question comes from the line of Vishal W. <unk>.
Please go ahead.
Good afternoon, and congrats on a nice quarter and thanks for taking the questions.
Two for me.
So you're guiding to over 20% organic growth. This year, maybe just talk about any puts and takes to consider as we build out our models for Q3 and for the rest of the year and then I had a quick follow up please.
Yes, Rick I think when I look at where we came into the year I think we guided to $732 million.
We're now halfway through we were at 742, so it's a $10 million increase since we initially guided into the year, we feel pretty good about that I think the normal cadence of some sequential step down Q2 to Q3 as is typical I think thats kind of where the second half modeling probably shake out.
Relative to two seasonality if you will.
That help.
Yes that does help.
Thanks very much.
And maybe just a quick update on your robot launch plan.
Are you still on track for early 2026 and will we see you Didnt ask thank you.
The answer is yes, and yes.
No it is.
It's kind of much like ours.
Country by my Diatribe.
With that Matt.
The.
We are doing the alpha on the robotic piece and it continues in earnest youll see the navigation piece added. So we will be doing cases by the end of this year with.
With a combined system in the market and then expect the influence to be 2026.
I guess as much as anything I'm, just I'm super proud of what they've reflected utility looks like take to see the <unk>.
A PTP, which clearly is something that's near and Dear and watch it through.
<unk> navigated robotic experience.
It's exceedingly elegant and so it provides me nothing but confidence in its influence of a broadened footprint.
So.
One of the really nice things is.
Just because the footprint is not very big the influence can be very big and we love. The fact that we're not pushing in a.
Monster piece of equipment that oftentimes is delivered in a semi truck what we're doing is bringing in something that can be delivered in a suitcase and but the key is the influence clinically and I think that based upon the design sophistication of our guys in Colorado and our guys in San Diego, who have been awesome.
I think it's an extremely sophisticated small footprint tool that ultimately is going to be exceedingly.
Sexual and that we're going to try to put it in as many places and be as disruptive as we can possibly be.
And your next question comes from the line of Matthew O'brien with Piper Sandler Matthew. Please go ahead.
Hi, there this is Anna on for Matt. Thanks for taking your question.
You had another quarter of strong surgical volume growth I think 28% and I'm. Just wondering if you could give a bit more color as to.
Really what drove that and then maybe if you could split that out between what youre seeing in the ASC versus.
The hospital sort of the trends there and your expectations going forward. Thanks.
Yes, I think when you look at maybe I'll take the second question first to get out of the way.
Mix is certainly sub 10% I mean, it's not it's not big.
At this stage, but certainly an opportunity I think for spine in general to kind of grow in influence.
For sure and I think we're well positioned for that because oftentimes. The ASC is really about patient selection and I think when you think about patient selection you think about how do you select those patients I think Eos Nielsen Center.
A great a great tool for that but it's about controlling team to in places where they can work into morbidity dynamic until I think all of our minimally invasive settings right for that but again I think it's.
It becomes a purge dynamic who should be selected within that realm.
So I think that's the answer on the ASC.
Question, you had on our growth in the quarter and what really drove the organic sales growth and then clearly volume was a big piece of that I think in this quarter, we saw a bit more utilization contribution than we have.
In quarters past and feel good about that I think the overall dynamic is we continue to compel surgeons and we're continuing to fuel that or support that debt.
That surgical interest of surgical adoption with the right sales force. So I think often times people kind of get it backwards like obligor hire the sales guy and he is going to drive this drive adoption, but but in reality I think people are are drawn to what we're doing.
The disruption in the market from a company standpoint has made fertile hunting ground for finding the right people to support the adoption and the demand from a surgical standpoint that exists and so we really feel good about the dynamics of the marketplace. We love our portfolio, we're making we continue to make <unk>.
<unk> in the portfolio I talked about a number of areas that we launched in the first half of this year that should continue to be tailwind into the second half in terms of specific portfolio additions. So.
We feel like we're in a good spot at the halfway Mark.
Great Thanks, and congrats on the quarter again.
Thank you.
And your next question comes from the line of Josh Jennings with Cowen Josh. Please go ahead.
Alright, thank you.
Congrats on the strong print.
Maybe a follow up to the last question just to build on your answer Pat just on the drivers of the growth.
I mean.
The PTP LTP lateral franchise seems like continuing to gain share in the U S lateral market.
These new products as you've called out with the circle track for cervical plate in Quebec to me I think deformity, maybe just help parse through the outperformance so far in the first half of the year as had been more weighted towards.
Driven more by the lateral business or some of these new product introductions.
And on top of that and maybe talk about the halo effect that you're experiencing with non lateral.
Products.
Yeah.
I would say.
It's a bit like you described.
I think timna the initiation of People's interest in <unk> has been in the lateral relevant and Theres a sophistication with guys like <unk> like the lease come in to build tailoring that people, who originally built the lateral franchise.
Kind of the foundational.
Leaders of what we've built here and so I think that theres, such a sophistication that I think that becomes the original and that's really kind of been the big growth driver, but to your point, what we're seeing now is that much like safe op has informed lateral surgery, we're seeing yields informing deformity and so now.
We're starting to see gosh.
These guys are starting to integrate the information that comes out of <unk> into the not only the surgical plan, but the deformity structure of what they are trying to build.
From a long contract perspective so.
What we're seeing and what makes us. So bullish is just the relevance of the ecosystem and candidly I don't think that we will begin to see our iOS influenced yet clearly we haven't even launched.
And so I think that there's two elements of it.
It will also be a very integrated ecosystem that haven't even started.
We see those things taking place and we understand kind of the relevance of the technology.
And we see that playing out Wisconsin, the net confidence drives things like server.
More difficult to distinguish but what we're seeing is an opportunity to distinguish ourselves in those in those Ralph again, the distinguishment maybe slightly more.
Sophisticated slightly less grand but there's still meaningful surgical distinctions that ultimately drive the confidence surgically that people are applying to goods and so I think that.
The term coined.
The Halo effect is a great one because its reflective of just an expanded confidence in what we're trying to build.
Great and my follow up I mean.
Related to really just looking at the surgeon user growth acceleration to Q versus <unk>.
I mean.
Are you attributing that to.
I mean, clearly the success in the market portfolio build out, but similar kind of frame up I mean are you seeing more lateral surgeons come in or is the expansion of the portfolio.
Driving that surgeon user growth acceleration because more surgeons are coming in for non lateral <unk>.
Procedures and products, thanks for taking the questions.
Yes, Josh.
Actually I think when you look at it.
That were just garnering broader interest.
And we're getting just a broader level of influence and attracting a broader set of surgeons.
We internally, we could point to a number of them you know it's been fascinating I think you'll appreciate this Josh is that if you.
If you look at our market share and then you look at our market share where there is an eos.
It is meaningfully bigger.
And I don't want to get into the numbers, but I will tell you we have not yet reflected the value of it in the in the ecosystem description as we as we have outlined it it's still like all of these things are coming to fruition, but again, we're seeing an outsized market share in those places where we havent healed.
Because guys are utilizing guys are interested in our goods are ability to infiltrate those accounts is high and so I would say that we've never had a bigger interest from academic institutions as we have in the last.
Happy new year and so.
Yes, I think it just speaks to we're getting in front of more fellows.
Being more relevant from an academic perspective.
We continue to see an expansion in the volume of surgeons interested in what we're doing.
Makes sense. Thanks, so much.
Thank you thanks, Josh.
And your next question comes from the line of Ben Hayner with Lake Street Capital markets. Please go ahead.
Good afternoon, gentlemen, thanks for taking the questions.
First off just on the penetration story and some of the commentary.
You just mentioned there can you maybe talk about.
What you've seen from some of the geographies that use historically or recently been under indexed to clear.
Clearly seems like there is a tipping point.
You guys propel adoption with individual surgeons individual facilities, but how does that play out on a kind of a geographic basis as their concentration that kind of gets you youll.
Youll see adoption accelerating.
Yes.
Let me take a shot at just kind of.
Generalities around it.
Okay.
Those.
Those of you who've been in spine for a long time I appreciated the Eos imaging is far and away the most coveted imaging style.
It's not even it's undeniable, having an active position of weight bearing position and understanding in spaces, where the fictional and from an alignment perspective.
Is that substantial value and so what we've seen is historically a lot of academic institutions utilize that technology in a way that ultimately.
There are yearning for some translation of quality they.
They see us, bringing a translational tool to that effort and they become enthusiastic with regard to where it could go when you start to think about the volume of variable that undermine that Eric.
Missouri, and you say what is missing and what's missing becomes a the informatics or the predictive nature of things and what he was providing us economy standards by which you can also create a predictive environment and so their enthusiasm is for us to push the envelope from an informatic perspective, such that we can get to a predictive stake.
That's where I would tell you.
What's the value of a company that ultimately forbids the durability of an environment from 25% to 10% or less than 5% or less I think that's real value creation and that's how we're serving the interest of the space and that's why we see the academic institutions one towards.
And your next question comes from the line of gates in chronic <unk> with Canaccord.
Nathan Please go ahead.
Hey, guys. This is Nick Hiller on for Caitlin Congrats on the strong quarter and thanks for taking the questions.
Two from us, but maybe I'll ask them together.
You raised guidance a bit more than the beat can you maybe give a little bit more color on where we can expect the increased expectation in the second half and then two is there any changes to free cash flow generation expectations and the timing of the cash students here.
Yes.
Thank you for your question so relative to the guide yes, I think if you look at where we came into the year at 732, we're now sitting here at 742 on the full year and to your point, we did raise the <unk>.
Second quarter guidance here or the guys here in the second quarter for the full year by a bit more than that we would expect that to kind of landed in the third quarter. So I think as I shared earlier, we would expect a sequential step down in absolute revenue Q2 to Q3.
And then that that Q3, though still is probably a bit higher than where the street's at today relative to the points.
Maybe in terms of where we would expect that.
That back half raise to show up.
As it relates to cash flows our expectation for the third quarter would be a range of plus one to plus five.
And then positive again in the fourth quarter. So that we would be again positive on the full year. So what I would tell you is we haven't really changed our cash flow guidance. We continue to land on the favorable end of the range.
That continues to give us confidence that we can deliver on the commitments we've made.
I think just overall guidance philosophy as you probably experienced has been.
We try to put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed so that's how you should think about the guidance.
Got it thanks, so much and congrats again thank.
Okay.
And your next question comes from the line of David Saxon with Needham David. Please go ahead.
Oh, great. Good afternoon patent Todd Thanks for taking my questions and congrats on the quarter.
Juggling a couple of questions.
Paul So I'll, just keep it high level and hopefully this.
This hasnt been asked and asked excuse me.
On the portfolio motion preservation.
Something you don't have I think you've talked about it in the past, but just given your focus on lateral and PTP I guess, how critical is showing that that gap.
Just to your overall growth outlook. Thanks, so much.
Yeah, I would say I think I think motion preservation and a well selected patient is good surgery.
The reality is we have so much work to do with regard to our current ecosystem and I think there is so much promise in terms of what we're doing we're going to let the other guys do the motion preservation stuff for a while and.
So what we're gonna do is we're going to exploit an asset base that is best in class and there is so much opportunity to run with that.
We can't be more enthusiastic the level of sophistication in our neurophysiology group is outlandish.
<unk> litigation in our navigation robotic group outlandish.
Sophistication in the imaging is.
It is unbelievable same with the mechanical side and so it's like let's exploit what we do unbelievably well and so that's that's kind of who we're going to be and in so far as far as the I can see at this point, that's who we are and it's been reflective of a reasonably good.
Run rate.
Great. Thanks, so much.
And your next question comes from the line of Jason Wittes would drop Jason. Please go ahead.
Hi, Thanks for taking my questions and congrats on solid performance first.
First off maybe just a financial question in terms of Capex.
For the year.
I guess, we can back into it but it could be sort of modeling this going forward I mean, what's your philosophy on capex. It sounds like you guys are committed pretty much from here on to positive free cash flow. So how does the capex kind of work into that.
<unk>.
Yes, Jason I think the bulk of our Capex spend is in instrumentation to support to support surgical growth.
So as we've talked about it and we laid this out in our long range plan construct is that for every dollar of year over year surgical growth, we invest 75 into inventory and instrumentation and that instrumentation part of course in the cash flow statement shows up in PPE and the obviously the inventory.
<unk> shows up in working capital and inventory and operating cash so.
Thats, where it shakes out I made the comment in my prepared remarks that we.
<unk> $16 million of operating cash inclusive of our investment in inventory.
And then spent about nine or $10 million in surgical instruments.
And we've added about $5 million of positive cash flow and so that's.
That should give you a sense for how that shakes out within our cash flow and you can kind of look at that line historically and I think as we think about growth the inventory in the instrumentation is a 75 on the dollar ratio of dollar growth year over year.
That's very helpful. Thank you and maybe just one quick other question on iOS.
In terms of the revenue you are reporting.
I assume that's specifically for the capital sales, but.
But could you give us a sense of how much of that.
Your business is capital sales versus some kind of purchase agreement type of arrangement.
At this point with Eos, and how that sort of shape.
The way the way.
It shakes out is about.
About about.
About $5 million a quarter or so is in a recurring revenue stream maintenance and warranty and the like.
And then the balance is capital.
But in terms of your sales of <unk>.
Of your approach to the market are you selling most of your systems.
Yes, we primarily sell the systems, Okay that answers my question. Thanks, I'll jump back in queue. Thanks, very much guys.
Thanks, Jason.
And your next question comes from the line of Sean Lee with HC Wainwright, Sean. Please go ahead.
Hey, good afternoon guys.
Congrats on a great quarter and thanks for taking my question.
As long as I'm wondering.
The companys growth strategies to expand the surgeon user base into new procedures.
We just have never tried before for the PTT will deformity. So I was wondering.
Maybe do you have any evidence anecdotal stories on.
How many of these new surgeons have you seen.
We are trying to do procedures a month once they come in for training.
Yeah, I guess, just just from an anecdotal perspective, I think one of the frustration.
Of lateral surgery historically has been.
If the gold hill of spine surgery, or decompression stabilization and alignment.
The lateral position is a more difficult position for which to realign our patient <unk>.
Additionally, it is a very difficult position to place pedicle screws and so whats happened with regard to PTP a prelim training. So is there in a much better position by which to garner alignment or lordosis as well as to do have access to both the front on the back of the spine until what we've seen is people who have historically dismiss lateral.
As a surgical tool.
I think.
Invigorated by the fact that there's so many options provided by a a a.
Composition lateral approach that they in essence.
Incremental way back into a level of interest.
One of the things that it feels like it is we inspire a fair amount of enthusiasm around the PTP thing.
And there are certain people, who have not trained in lateral surgery, who I think will be health care assisted by navigation and say to be able to take navigation and integrated with neurophysiology into the workflow of surgery, we feel like that just opens up a democratizers more people's interest in that technique.
I don't think that anybody doesn't want to have that in their armamentarium of tools to apply to a patient it's more a matter of where are they comfortable until the ways that we can make people comfortable through technology is what our interest in it and we're seeing that being played out.
So yes.
Anecdotally that terminated.
Thanks Leila.
Thanks for that that's very helpful. That's all I have.
There is no further questions at this time I would now hand, it over to Pat miles for any closing remarks.
Yeah, I would just add and like the last slide says is our best is yet ahead, and we have a heck of a run in front of US we want to be the preferred location.
Our destination to the best of the best salespeople to translate the type of things that are going on in here. So anyway. Thanks, everybody for your support and interest in ADM.
Yes.
That concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Okay.
[music].
Yes.
Okay.
Yes.
Yes.
Yes.
Yes.
Okay.
[music].
Okay.
Sure.
[music].