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Earnings call: ATEC reports robust growth amid strategic expansion

EditorAhmed Abdulazez Abdulkadir
Published 05/08/2024, 07:56 AM
© Reuters.
ATEC
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Alphatec Holdings , Inc. (NASDAQ:ATEC), a medical device company focused on the design and development of products for spinal surgeries, reported a strong start to 2024 with significant revenue growth and expansion plans during its Q1 2024 Financial Results Call. The company highlighted a 27% increase in total revenue, reaching $138 million, and a notable 30% surgical revenue growth. Adjusted EBITDA expanded by 450 basis points, reflecting efficient operational management. ATEC's CEO, Patrick Miles, underscored the company's strategic focus on the spine market and its commitment to innovation in neuromonitoring and surgical predictability.

Key Takeaways

  • ATEC reported a 27% year-over-year revenue increase to $138 million in Q1 2024.
  • Surgical revenue and volume grew by 30% and 23%, respectively.
  • Adjusted EBITDA expanded by 450 basis points.
  • The company trained 150 surgeons, leading to a 21% increase in surgeon adoption.
  • ATEC is expanding internationally, with a focus on Australia, New Zealand, and Japan.
  • The company forecasts full-year 2024 revenue to be approximately $601 million.
  • ATEC aims for cash flow breakeven in 2025 and positive cash flow thereafter.

Company Outlook

  • ATEC expects total revenue to reach around $601 million for 2024.
  • Anticipated surgical revenue growth is approximately 27% to $536 million.
  • EOS revenue is projected at about $65 million.
  • The company plans to achieve cash flow breakeven by 2025.

Bearish Highlights

  • There is a lag in the influence of new sales hires on revenue growth.
  • The company has not presold the entire Insight platform of the EOS business.

Bullish Highlights

  • ATEC is confident in the growth drivers of its lateral surgery, EOS platform, and international markets.
  • The company is developing tools for pre-operative alignment and surgical planning.
  • It holds close to 90 patents granted or pending worldwide for its EOS technology.
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Misses

  • No specific misses were discussed in the provided summary.

Q&A Highlights

  • The company discussed its methodical approach to entering the Japanese market.
  • ATEC is bullish on its long-term prospects, particularly with the EOS Insight platform.
  • The CEO highlighted strong organic growth in key U.S. markets and the upcoming PTP meeting with over 50 surgeons.

Alphatec Holdings, Inc. (ATEC) has showcased solid financial performance in Q1 2024, driven by its strategic focus on the spine market and its commitment to innovation. The company's robust revenue growth and expansion into new markets, such as Japan, indicate a strong trajectory for continued success. ATEC's investment in revenue-generating assets and its deliberate approach to sales force expansion underpin its confidence in achieving cash flow breakeven by 2025 and generating positive cash flow in the years to follow. With a comprehensive plan for growth and profitability, ATEC appears well-positioned to capitalize on opportunities in the spine surgery market.

InvestingPro Insights

Alphatec Holdings, Inc. (ATEC) has made a noteworthy start to the year, as reflected in its recent financial results. To provide further context to the company's performance and outlook, here are some key metrics and insights from InvestingPro:

InvestingPro Data:

  • Market Cap (Adjusted): $1.87 billion USD, underscoring the company's significant presence in the medical device industry.
  • Revenue Growth (Quarterly) for Q1 2024: 30.23%, indicating a strong start to the year that aligns with the company's reported increase in surgical revenue.
  • Price / Book (as of Q4 2023): 23.99, which is relatively high, suggesting that the market values the company's assets and future growth prospects.
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InvestingPro Tips:

  • Analysts have recently revised their earnings expectations downwards for the upcoming period, which may impact investor sentiment.
  • Despite strong revenue growth, analysts do not anticipate the company will be profitable this year, aligning with ATEC's own forecast of reaching cash flow breakeven by 2025.

InvestingPro provides additional insights and tips for investors considering ATEC, with a total of 8 InvestingPro Tips available at InvestingPro ATEC Q1 2024:

Operator: Good afternoon everyone and welcome to the webcast of ATEC’s First Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in today’s press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Leading today’s call will be ATEC’s Chairman and CEO, Pat Miles; and CFO, Todd Koning. Now, I will turn the call over to Pat Miles. Please go ahead.

Patrick Miles: Thanks much Desiree and welcome everybody to the Q1 2024 Financial Results Call. We will be making some forward-looking statements and so I would ask you to review that at your leisure. A quick review of the Q1 2024 highlights. We are establishing a foundation to deliver profitable long-term growth. Pretty clear. $138 million in total revenue, which is a 27% revenue growth. 450 basis points of adjusted EBITDA expansion. 30% surgical revenue growth. 23% surgical volume growth. 6% growth in average surgical revenue per case. And so from an adoption perspective, 150 surgeons trained in the quarter. That drove a 21% increase in surgeon adoption. From an investment in revenue generating assets, we continue to invest in a market that is either apathetic or disrupted. Without an expanded asset volume, you cannot support a market that clearly demands ATEC. So we deployed $60 million to enable a growing sales team to serve an expanded surgical volume. So speaking of the sales team, we are confident in the robustness of the growth as we continue to see outsized growth in especially our established territories, which was 28% growth of same-store sales. So we think that's a great statistic. We often around here talk about how the spine market needs ATEC and that ATEC is different. One of the key drivers of what makes us different is that we are 100% spine focused. Imagine that. Much like our surgeons, all we concentrate is spine. So being spine-only focused ultimately gets reflected in know-how. When we talk about know-how, we mean sophistication and we mean unmatched mechanical imaging, navigation, and neuromonitoring expertise. When you have know-how, ultimately what you do is you create clinical distinction, which ultimately compels adoption. It compels adoption from surgeons as well as attracts salespeople that ultimately are interested in being aligned with your efforts. So what we know to be true is that surgeon’s desire architecture of procedures, not widgets. So what we do is we assemble fully contemplated spine procedures from the ground up. The spine world is -- the spine surgery is a world where there requires management of many, many variables. Our belief is that objective measure through informatics can bring about an environment where these variables are much better managed. You will find us to be a deliberate bunch. We always say our best is yet to come and it's no tagline. So when you start to look at the growth drivers associated with a company, it's very clear that the opportunities are abundant. When you look at the graph and you start to look at what our participation in lateral has been, it has really been the growth driver of our business. You see everything above that, the EOS informatics, Valence, International, and the U.S. Salesforce (NYSE:CRM), all are incremental growth drivers to our strategy. So the great thing is things are progressing, things are progressing as we intended, and our bullishness in terms of perpetuating this growth profile is in front of us. So what I'd like to do is update each of these areas real quick and kind of give you a perspective as to kind of how we see the landscape. So I think something to appreciate is lateral really is the most coveted sub-market in spine. It is why lateral leadership for us is so important. It's growing faster than the overall spine market, and it's been really verified by 500 peer-reviewed publications that reflect its many advantages. Our team is the group of people that created lateral surgery. So we are steeped in the understanding of the technique, and we are committed to the requirements that really best equips us to make for the biggest impact in the space. And so our enthusiasm around lateral surgery is significant, and it will continue to be a growth driver. I think when you originate something, you tend to have a much better understanding of its requirements. And the one thing that we know absolutely true is that neuromonitoring, really automated neuromonitoring, is an absolute requirement of lateral surgery. When you start to think about the relevant anatomy in lateral surgery, what you must know is that when surgeons do lateral surgery, their concern is the femoral nerve or the nerve plexus. And what stands between the skin and the spine of concern is the femoral nerve and the plexus. And so when we originated lateral surgery, what we did is we used EMGs to identify where the nerve was. That was very important information. But the question becomes is, are you willing to evolve the technique in a way that enables you to not only identify where the nerve is but monitor the nerve over time. And so when you think about identifying nerve location, that's EMG. When you think about monitoring the nerve over time, that's SSEP. One of the core distinctions of Alphatec Spine is our perpetuating understanding and application of know how to evolve neuromonitoring. So what we've done is we've not only automated EMGs but we've automated SSEP. It is a clear distinction in addressing the areas of greatest concern of surgeons. And you can see that if you look at the complications profile of lateral surgery, it's reflected in neuro-related complications. If you're going to continue to get better in that space, you need to draw an objectivity to the very challenges that are associated with the approach. It's fascinating to look at the historical leadership, which was really the historical leadership in lateral, which was defined by neurophysiology. The challenge is the historical leadership in lateral surgery hasn't evolved. The same monitoring modality that a 50% market shareholder uses is the same one they used back in 2003. The opportunity for us to distinguish ourselves in this space has been reflected. And that's why we are so bullish with regard to our continued growth. And also, so clear that our growth profile is no coincidence. And so SafeOp is the foundation of the technique and why we are so bullish in terms of moving forward. So the reason why other companies haven't done sophisticated things in spine neuromonitoring is that it's very, very hard. SSEPs are very small signals. Interpreting them among the other electrical noise in the OR is profoundly challenging. That is why the algorithms that interpret them are not only well protected from an IP perspective but also integrated into the corporate know-how or trade secrets of the company. We have the four most neuromonitoring design and development expertise in the business. We have greater than 60 neuromonitoring experts continually advancing the technology. We have 11 peer-reviewed clinical publications on SafeOp. We have 52 SafeOp patents granted globally and 45 pending. And so we are steeped in know-how and we have protected this area because I think we understand its relevance. People often ask me whether someone can copy PTP and LTP? My response is they can copy certain elements of the procedure, but what they can't copy is the sophistication of understanding the technique on how we integrate the tools, but also there is no replicating the neuromonitoring aspect. That is the great distinction. It is the demonstrated proxy for great lateral outcomes and leadership in the space. And so when you start to think about us as a company, the one thing that we won't do is sit by idle. We have the leading most evolved lateral franchise in the business, but we are nowhere close to being done. We're applying all that we have learned into what's next. We have in excess of 230 product development engineers completely committed to continued innovation. That goes into the EOS platform that will ultimately drive an alignment influence. It will be the Valence, which is our navigation robotic platform that will ultimately elevate the precision. It includes evolving our SafeOp platform with automated MEPs, which will give a better understanding of motor evoke potentials and kind of the motor health of the nerve during the surgery. It also expands the indication. When surgeons initiate the utility of a new technique, oftentimes, they start in the most simple application. The beauty of our growth profile forward is the expansion into things like corpectomy, a larger influence in deformity. And so just the opportunity to continue to expand the space in a way that from an application standpoint, that is completely apparent to someone who's been in this space for a long time. I think the other growth driver is that we've talked about the market size, and the lateral market is a place that we're making impact. And so we consider ourselves in the approximation of a 12% market shareholder in the lateral space. But we're also expanding the space in a way that ultimately we are seeing PTP utilized in what historically would be more posterior approach type techniques. And so the TLIF and XLIF market is being disrupted by PTP in our lateral contribution to surgery. So when you create confidence with surgeons by offering them something that they haven't done before, oftentimes, what it does is it expands the utilization of other products. And this is what we call the halo effect. And one of the great things is when you look at the revenue profile of the company, you're seeing that happen. You're seeing a robust utility of our lateral products. And then what you're seeing is the expansion into, as I say, the halo effect of the other techniques. So another driver, an incremental driver is EOS, love what we're doing on the EOS front, cannot be more excited. We have our EOS Insight launch. We committed that Q2 '24. Q2 '24 has come into fruition. It's a software solution that has been in development for as long as we have owned EOS. So we started off defining how to ultimately integrate the tools relevance in surgery, and that's happening as we speak. So Insight is a new feature set that will make possible all the capabilities of not only automated surgical alignment, automated surgical planning, we will integrate patient-specific implants with it, drive the reconciliation into the operating room and ultimately drive an assessment and follow-up effort. What that drives ultimately is an assembly of data that I think is currently underway, but wildly under appreciated. We recently earned a high trust at a station that enables data housing and sharing of the identified data. We're the only company automating and capturing standardized images and clinical data that we believe will improve patient care. We believe that this will bring about a greater predictability. So EOS is also a great moat. It is a technology near impossible to replicate, and we have close to 90 patents granted or pending worldwide. And so at least the way that we think about EOS is much the way we think about SafeOp. From an influence perspective, the SafeOp is the lateral what EOS is to alignment. And so we believe that automated neuromonitoring will ultimately provide an objective source of information that drives clinical decision-making. We believe the same with regard to EOS where the alignment information will drive an objective information to drive improved decision making. There's way too much Gestalt [ph] in spine surgery. And so the opportunity to evolve the current standard, if you appreciate the current standard, it's somewhat underwhelming. So most of the alignment planning is literally done by Gestalt. If somebody does plan, it's oftentimes time consuming, it's arduous, it's uninformed. And so what happens in surgery, if you think about alignment surgery being the greatest to a long-term successful outcome and people are utilizing their historical Gestalt, there suggests a variable to that effort that is, in our minds unacceptable. And so what we're bringing to bear with regard to EOS is a standard. And so the opportunity to automate the calculations and that creates simplicity so that we alleviate the surgeon's work in creating this alignment opportunity, again, appears like a very apparent opportunity to mitigate some of the variables that ultimately drive predictability. And so we're super excited about that. The key though is what you have to do is you have to integrate into the operative experience. And so we have a tool that will ultimately enable us to take the pre-op automated alignment, the surgical plan and integrate that into the operating room. So the two places that will be affected from an interoperative perspective is we will have patient-specific implants that will have been contemplated via the preoperative plan, but we will also have an automated reconciliation tool in the operating room to assist in refining the alignment to the reflected plan. And then what you'll see is the opportunity to collect all of that data and have it provide a predictive analytic capability that will ultimately again drive more objectivity. So if there's one thing that we want you to take away from what we're describing and what we're doing is we're trying to mitigate the Gestalt in the guessing and drive a level of objectivity that ultimately reflects in better decision-making and more predictability in surgery. And I think that that's resonating with people, and that's again why we're so bullish with regard to the reflective growth profile of the company. Another element that is a tailwind with regard to the incremental effort that we're making is our Valence platform. We acquired it about a little over a year ago. We feel great about where we are with regard to the design and development effort. We have already started to place pedicle screws with the system. Really, the ultimate reflected value will be as we integrated into the workflow of lateral, our enthusiasm to do that is significantly high. The progress that we've made is exactly what we intended. And so our bullishness with regard to that technology and the incremental benefit to that is very apparent. So another tailwind to our growth is international. The one thing that Todd and I committed to do is to be narrow and deep within markets. If you look at the markets that we're participating in, that's exactly the fact that we've taken. Australia and New Zealand is doing outstanding. The team in Australia and New Zealand is outstanding. If you start to look at the demographics, it's a great market size. We started to generate revenue. We have over 40 surgeons that tend to, in essence, a lateral think tank. We have 20 surgeons trained. I think the great statistic on this page is the 400 PTPs performed to date. And I think it's reflective of going into a marketplace describing the benefits of a technique, preparing surgeons to have success with it and reflecting as much in a very narrow way. So we think it's a proxy for Japan. Japan is next. Japan is a large market. We so cover that market. We're super excited about that market. We have our poster fixation cleared in that market. We have Dr. Pimentes [ph] highly regarded in that market, and we expect a large footprint of success to follow. And so just another incremental tailwind as we see it. As it relates to the disruption in the marketplace, we face an unprecedented market opportunity. That commenced last fall with industry consolidation, capitulation and leadership change. As we look at the market, we see it as 35% disrupted. Other than us, the rest apathetic. And so what an opportunity. And so oftentimes, we talk about these things and we talk about that they happen over a period of time. There's a great proxy out there with regard to the Stryker (NYSE:SYK) K2M. It was a dynamic that transpired over multiple years. And I think that everybody expects all the activity to happen overnight, we are making as much progress as we can manage. And we expect this to continue over the coming years and cannot be more excited about it. We also remain in a position where we have about a third of the U.S. that is still on or under covered. So we have so many opportunities that we get to expand into. We have been strategically adding in Southern California, up in the Northwest, part in the Midwest and clearly up in the Northeast. And so can't be more excited about the walk there. There is a ton of opportunities. There's a ton of local opportunities. We're making progress locally. We so cover the opportunity to have fluidity within the company of people that will ultimately effectuate the strategy of our company. I think also as you start to look over major market impact. In just two years, we began to move the needle in New York, in Houston, in Phoenix, in Chicago, just to name a few. It's exceedingly exciting for us. We have about 6% market share in the U.S. But in our best markets, literally, we have 25% market share. And so we see this as one that is predictive of a broad opportunity that we hope to replicate over the coming years. And so I would tell you that we are well positioned to create value and we feel great about what we are. Just to remind everybody of the commitments that we made at the LRP. And again, love where we are, we'll continue to remind you guys of these commitments. But what it is, is $1 billion in 2027, $180 million in adjusted EBITDA, which is an 18% adjusted EBITDA margin, and free cash flow of $65 million. And so what that does is it contemplates a 20% revenue CAGR, 200 basis points of margin expansion and cash flow breakeven in 2025. And so with that, I will turn it over to Todd.

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Todd Koning: Well thank you, Pat, and good afternoon, everyone. We appreciate you joining us on the call today. I'll begin with revenue. First quarter revenue was $138 million, reflecting 27% growth compared to the prior year and flat sequentially. The $138 million in revenue is comprised of $123 million in surgical revenue and $16 million of EOS revenue. First quarter surgical revenue of $123 million, increased 30% over the prior year. This growth was against a strong comparable of 55% in the first quarter of last year. It was the highest growth comparison we have ever lapped aside from a pandemic rebound influence quarter in 2021. And while lateral was again the largest contributor, growth continues to be strong across our entire portfolio. Surgical revenue was driven by robust procedural volume growth of 23%, which is a reflection of an increase in the number of surgeons adopted ATEC procedures and an increase in surgeon utilization. Average revenue per case grew 6% year-over-year, driven by a higher mix of lateral surgeries and increased case complexity, offset to a degree by improving mix of surgical surgeries. EOS revenue in the first quarter was $16 million, up 5% compared to last year. Similar to surgical revenue, EOS lapped a sizable 47% growth comparison, is toughest since the close of the acquisition. Next, I'll turn to results for the remainder of the P&L. First quarter non-GAAP gross margin was 71%, up 50 basis points compared to the prior year. The year-over-year increase was primarily driven by improved EOS gross margin, which is benefiting from pricing initiatives, a growing U.S. mix and improved service operations as well as strong volumes or fueling leverage of our Memphis distribution facility. First quarter non-GAAP R&D was $14 million and approximately 10% of sales compared to $12 million and 11% of sales in the prior year. The increase on an absolute dollar basis was driven by continued investments in organic innovation and development of Valence, the robotic navigation platform that we acquired in April of 2023. Non-GAAP SG&A was $101 million and approximately 73% of sales in the first quarter compared to $81 million and 74% of sales in the prior year period, up 90 basis points. Included in SG&A is the expected step-up in depreciation related to the purchase of instrument sets, our revenue-generating assets. As a percent of sales, depreciation increased about 200 basis points year-over-year. Excluding that impact, SG&A improved by 300 basis points as a percent of sales. The significant improvement was driven as expected by infrastructure leverage and improvements in our variable selling rate. Total non-GAAP operating expense amounted to $115 million and approximately 83% of sales in the first quarter compared to $93 million and 85% of sales in the prior year period, demonstrating 200 basis points of operating leverage year-over-year. Adjusted EBITDA was a loss of $3 million and approximately 2% of sales in the first quarter compared to a loss of $7 million and 7% of sales in the prior year, a 450 basis point improvement. Leverage was driven primarily by the 300 basis points of SG&A leverage, followed by 100 basis points of R&D leverage and 50 basis points of gross margin leverage. The consistent adjusted EBITDA margin expansion that we are driving is aligning solidly with our expectations, giving us great confidence in our ability to execute to the long-term profitability commitments that we detailed at the long-range plan in March. Turning to the balance sheet. We ended the first quarter with $144 million in cash. Debt at carrying value was $527 million. Free cash use totaled $70 million, with approximately $60 million of that deployed as planned into the inventory and instruments that support the expansion of our distribution footprint and the new product launches. The chart at the bottom of this slide depicts that investment into revenue-generating assets has stepped up and has represented the majority of cash flow used over the last several quarters. We raised cash in 2023 to capitalize on industry disruption equipping our expanding sales team with the assets they needed to serve surgeries and grow their territories. We are now putting that capital to work and will continue to do so throughout the year. We continue to expect cash use to approximate $100 million for the full year, stepping down from Q1 to Q2 and progressing towards cash flow breakeven in the second half. The next slide adds context to our revenue-generating asset investments. Generally, the ratio of asset investment to dollars of year 1 surgical revenue growth is about $0.75 to the dollar. Over their 5-year useful lives, those assets investments generated 3x return. And looking back to 2022, the 75% framework was intact. Adjusted EBITDA was negative, so we need cash to fund both the negative adjusted EBITDA and the investment in sets and inventory. In 2023 and 2024, our long-range plan forecast over $200 million of surgical revenue growth and inflection to positive adjusted EBITDA. Over these two years, we are investing significantly more than we typically would to support accelerated growth in the sales team. The magnitude of asset investment over that time frame will exceed revenue dollar growth, putting us ahead of the 75% framework. And from year-end 2025 to 2027, our long-range plan forecasts just under $400 million of revenue growth. Adjusted EBITDA over that time is expected to comfortably surpass the investment in sets and inventory. That inflection in our financial profile is incredibly important. We are on the cusp of self-sustaining growth with profit generation poised to more than cover the asset investment that the long-term growth of our business requires. And that explains how we will achieve cash flow breakeven in 2025 and cash flow positivity beyond. Another important point is that with investment exceeding our general 75% framework in 2023 and 2024, we are creating an asset base capable of supporting more revenue than contemplated in the long-range plan. And from an asset standpoint, we are well positioned to support incremental revenue growth. Now turning to our updated outlook for the full year 2024. We expect continued market share expansion to drive total revenue growth of 25% to approximately $601 million. That includes 2024 surgical revenue growth of approximately 27% to $536 million and EOS revenue of approximately $65 million. Surgical volume growth will be the greatest contributor to surgical revenue growth, and we now expect that to increase at a low 20% rate for the full year, a little higher than we previously expected. Revenue per surgery growth also contributes to surgical revenue growth. We continue to expect that to increase at a mid-single digit percent rate for the full year. I'd like to point out that prior to our October capital raise, consensus was around $555 million for the full year 2024. Only six months later, guidance is now north of $600 million, which is $45 million higher than the number prior to our raise. The new reps we are attracting are highly tenured and strategic geographies. While the benefits of market disruption will not be reflected overnight, it is clear we are executing on the intent of the raise. Now turning to profitability progress. Sales growth continues to fuel leverage across our business. We now expect full year 2024 adjusted EBITDA of approximately $23 million, which equates to 570 basis points of margin expansion. That implies an approximate 27% drop-through on the year-over-year growth in revenue dollars, an acceleration compared to the 22% drop in 2023. The degree of progress that we've already delivered with drivers of expected leverage contributing as planned give us great confidence in the updated profitability commitments that we shared as part of our long-range plan update. Specifically, from 2023 to 2027, we expect to deliver another 2,000 basis points of operating leverage. The majority of that or about 1,000 basis points will be driven by contractual time-based variable selling rate improvements. Another 700 basis points will fueled by SG&A infrastructure leverage, and the remaining 300 basis points will come from R&D improvements as a percent of sales. Note that the R&D will continue to increase on an absolute dollar basis positioning us to consistently lead spine innovation. That continued operating progress will enable the business to be cash flow breakeven in 2025. The deliberate increase in profitability will support continued investment into the long-term growth of our business while powering an inflection to solid cash flow generation. Now I'll close with what sets ATEC apart in terms of the value creation opportunity ahead. With a 40% revenue CAGR over the last five years, our growth stands out, not just in magnitude, but in consistency, particularly as our revenue base has grown. We have clearly demonstrated execution and in the integrity of demand for ATEC clinical distinction. We are the most differentiated, most spine-focused pure play and a big U.S. spine market. That sizable consistent revenue growth has opened the door to our next leg of value creation, which is profitability. We have already demonstrated progress and have a clear line of sight to a self-funded future. Fueling our long-term financial growth story are catalysts that make the ATEC story especially compelling. We're cultivating our lateral franchise with innovation to continue to earn share of the lateral market and convert more traditional surgeries to lateral surgeries. Our industry is undergoing unprecedented disruption, and we are capitalizing on it. We are readying to launch enabling technology that uniquely integrates into spine workflows, including in deformity, where we are building a procedural solution around EOS, and we are laying a foundation in attractive international markets where we can replicate the U.S. adoption curve. There is truly a lot to be excited about, and I look forward to sharing the progress with you. With that, I will turn the call back over to Pat.

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Patrick Miles: Thanks so much, Todd. I think with all the goings on in the spine space, the opportunity to improve spine surgery is significant, and that will be our value driver. When there's revision rates that are reflective of 10% to 15% in degenerative, 25% to 30% in adult deformity, the durability of spine surgery is called in the question. Clearly, ATEC is in a unique position to lead, and we look forward to doing so. And with that, what we'll do is turn the call over for questions.

Operator: [Operator Instructions] The first question comes from the line of Joshua Jennings with TD Cowen. Your line is open.

Joshua Jennings: Hi, good afternoon. Thanks for taking the questions, and congratulations on the strong start to 2024. Pat, I was hoping to ask about the opportunity in deformity. I know you guys have talked about this multiple times over the last six to 12 months. But one, maybe just help us think about ATEC share in deformity, may be hard to parse out. And then on top of that, I was hoping to just ask about the evolution of SafeOp and integrating motor book potentials into the monitoring platform and how important that it is to the deformity procedure just one performing procedures ATEC's future share taking? And then I have one follow-up on EOS.

Patrick Miles: Yes. Josh, I think the opportunity to influence deformity is very apparent and opportunity. I think the most coveted tool in evaluating deformity is an EOS image. And I think bringing about predictive analytics to a field that completely lacks it is an opportunity to distinguish. And so it's been so exciting to see the automated measures, the planning, understanding reciprocal change in the levels, bringing that into an operative experience and understanding that you can refine a patient-specific implant and then you can refine it in the operating based upon the information delivered. And then just the ability to take that information and have the exact postoperatively, it is almost predictive analytics by description. And so you think about the type of revision rates that you see in deformity and you think about what are the variables that you're trying to control, and we think the great tool to control variables is the EOS image and ultimately how we utilize that in the surgery. And so we're a big player in the grand scheme of things in deformity. And we feel like this tool really brings us to the forefront of both adult and idiopathic. We have a long way to go from a design development perspective in terms of some of the implant systems in that realm. We're doing a good job, but we have opportunity around. And so I would tell you, from an EOS perspective, the most coveted tool in the business. From an implant perspective, I would say, good to very good. We will be great. We have the mechanical aptitude to be great. I think the big sleeper is SafeOp. And I think that when you start to especially if you think about idiopathic deformity and you start to think about how disruptive MEPs are today, and the ability to do things like facilitation in a way that you don't need the voltage to ultimately test the motor elements of the cord and to be able to assess that by not disrupting surgery, we feel like it's another significant benefit. And so we feel like in both the adult and in the idiopathic realm, there's significant opportunities technologically to distinguish ourselves, which ultimately, this is a group that's steeped in research and a group that doesn't make decisions to change easily. But our technology portfolio, I believe, will provide that impetus.

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Joshua Jennings: Great. And just one follow-up on the technology question. Just on the interop alignment and automated reconciliation tool. Can you just help us understand where you are in that development process? It looks like from one of the slides that there's a at least a prototype or maybe that's already in play. And I'm just behind. But how important is that technology? Where are you guys in development there? It looks like it may be the only FDA -- non-FDA-cleared, I guess, piece of the EOS Insight platform, and that may just be an over read by me on the slide.

Patrick Miles: No, I think it's the right catch. The interoperative reconciliation is not something that has historically been done. And so we're, in essence, making a market there. And we're early on in the experience with that. We expect FDA clearance by the end of Q2. But I will tell you, this will be kind of a long effort in terms of creating utility and simplicity and seamlessness in the operating room. So it's our most immature element of the Insight portfolio of goods, but one that we believe to be very, very valuable over time. So I'll look forward to more updates, but your catch is exactly the right one.

Joshua Jennings: Thanks a lot, Pat.

Operator: Our next question comes from the line of David Saxon with Needham. Your line is open.

David Saxon: Great. Good afternoon, and thanks for taking my question. I'd love to talk about the competitive powering you've seen over the last few quarters, but specifically around what you're seeing in terms of leakage in territories that are covered by those competitive reps? How effective has cross covering been in regions that are impact -- or covered by, I guess, non-competes? And then anything to update to the hiring from, I think it was 50 last year disclosed in mid-March. And then just quickly for Todd, any selling day impact in the quarter? Thanks so much for taking my question.

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Patrick Miles: I'll start off and then I'll let Todd. I hate to say clean up, but decision. It's the way we work together. Anyway, the hiring is going very, very well. It's entertaining. I get the opportunity to sit with our sales training class, and I sat in there yesterday with 30 people, men and women. And there is not a company that's not represented in the people who are coming to ATEC. And so One of the things that we committed to, and it's almost like the international focus of, hey, we're going to go narrow and deep. We're going to grow our sales force in a very deliberate way. Our sales leader is a very disciplined guy, Dave Sponsel, and I think that he's done a superb job in terms of being methodical with regard to the geographies that we drill into and how many people within those geographies, can we support them from an implant and instrument and a procedural perspective. And so there's a lot of things to bring to bear. And so trying to be deliberate and precise in these efforts is hugely important, but we continue to grow the sales force. There continues to be a lag in terms of their influence, but I would tell you, great progress is being made. The difference between I think, the perspective from a banker investor standpoint is, I think, there's an expectation that happens overnight. And I think I tried to utilize the proxy of the K2 Stryker as one that would suggest these things take time. And as we look back on them, they're going to feel quick. When you do the work through them, they're not so quick. And so anyway, we remain bullish. It's a long tail, and we are super excited about our prospects.

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Todd Koning: And David, I think I would add to that. Clearly, we're seeing the impact of the hires that we've made. I referenced that specifically in my prepared comments. And so I think it's clear that those hires have been having an impact in the way that we expect. Everyone is different and everyone is in a unique situation. So there's variability from one geography to another. But I would say nothing outside of the bounds that we would expect. And so I would say, very much as planned. To Pat's point, there's a ton of interest. You look at the people who are coming into the building represents all the major players. And so I think our belief is we're absolutely doing the deal as we laid it out. And the beautiful thing here is that there's much more to come as we look forward to that. And to your specific question on selling days, we're 64 selling days here in the quarter. No impact year-over-year, and I think it's about two days more than Q4.

David Saxon: Great. Thanks so much.

Operator: Next question comes from the line of Vik Chopra with Wells Fargo. Your line is open.

Vik Chopra: Hey good afternoon, and thanks for taking the questions. I've been bouncing around on calls, so I apologize if this already been asked. But can you maybe just talk about what you saw -- what trends you saw during the quarter with respect to patient volumes? And then I had a follow-up, please.

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Patrick Miles: Yes. I guess this is Pat. I think what we saw is a pretty consistent flow really all the way through the quarter. There's -- yes, I think there are some vacations in the back end of March, but again, nothing that would create any discerned interest. So it felt very, very normal.

Todd Koning: Felt good, Vik, anyway. As you can see, we clearly overachieved relative to our expectations. And also, the exit velocity there gives us a level of confidence to raise forward guidance as well, especially on surgical revenue. So I think to Pat's point, you've always got kind of Q1 vacations and timing with different types of holidays. But on the whole, I felt very good about the trends and where they're headed.

Vik Chopra: Okay. And then just as a follow-up. Maybe just talk about the cadence of revenues and margins as we think about the rest of the year, specifically in Q2 and Q3. Thank you very much.

Todd Koning: Yes, definitely. I think as we kind of look at our overall revenue growth of 25%, so $601 million. Now I think, ultimately, our view is that you look at that being on average just about 25% growth. I think you'll see something similar to that in kind of Q2 and Q3 plus or minus. I think when we look at the guide, you saw us really kind of probably beat our expectation relative to EOS in the first quarter. Fundamentally, I think that's a little bit of timing movement from Q2 to Q1. And then ultimately, when you look at the profitability walk, I think our profitability view is -- adjusted EBITDA, we raised guidance by $1 million, went from $22 million to $23 million. That $23 million means 570 basis points of margin expansion on the full year. We did 450. And I think as we've been talking about the first half of the year, will be maybe 100 basis points of margin expansion less than the full year, so kind of 450 to 500. The second half would be probably 100 basis points north of that. So kind of think on total like 650 to 700 in total. So when you kind of boil that out, I think in absolute adjusted EBITDA dollars, you're probably close to breakeven in the first half and the balance coming in the second half. So I think on the whole, that's how we see the timing of revenue and profitability walking through the year.

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Operator: Next question comes from the line of Caitlin Cronin with Canaccord Genuity. Your line is open.

Unidentified Analyst: Hey it's George [ph] on for Caitlin. I kind of wanted to dig into more of EOS guidance. Obviously, you raised your full year guidance, but just any more color you could give in terms of why you reiterated EOS revenues when the quarter looked pretty strong from our end, especially with the Insight being launched. Maybe talk about if -- how much of that is based on the expectations and if there's any more upside there? And then I have one follow-up.

Patrick Miles: Yes. I guess I'll start off. The one thing that's unadulterated truth in capital equipment is there's a lag. And what we haven't done is presold the whole Insight platform. And so we have a lot of work to do to go out and sell Insight. We are hugely bullish in terms of the long-term prosperity that's generated by EOS Insight. But candidly, a few people know about it. And so our opportunity to ultimately lay the foundation for our future large business, I think, is reflective of our thoughtfulness on the guidance front.

Todd Koning: Thanks, Pat. And I think the other thing I would add to that, just a couple of contextual things. The $65 million is a 9% year-over-year growth. If you recall, last year, we had about $2 million of onetime buys associated with a market exit. And so when you strip that out kind of on a like-for-like basis, you get to a mid-teens growth. And so if you look at that $65 million, another way you look at over the last two or three years, we've grown that business 20% year-over-year. And so underlying strength of the EOS business, I think what we've delivered is quite strong. I will say, when you look at our guide being 65 going into the year and then the performance we had this year, keeping it 65, really, I would tell you that it reflects a level of conservatism associated with the capital equipment market and probably just being a little bit conservative on that point. And from your question relative to how does EOS Insight launch impact our view? I think I'd just point you back to past comments, which is I think that will be reflected ultimately in interest in orders. And if you think about the capital selling cycle being a 12-month cycle, there's some time that I think once we really start to see EOS Insight influencing the revenue. Certainly, I think we'll start to see some orders matriculate and come through here over time. But that's really how we view the 2024 EOS revenue setup.

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Unidentified Analyst: Yes. That's really great color. And then just one quick one for me. Just early days in terms of Valence obviously. But can you talk a little bit about appetite among your existing EOS users and really any insights in how many of your existing U.S. users are currently using robots and competitors? Thanks.

Patrick Miles: Yes, that's a tough question. I think our customer base is pretty reflective of just kind of the general audience of robotic users. And I think we've always had a little bit of a disparate view with regard to the value of robotics as they currently are reflected. And so the bullishness of our Valence strategy is really in the integration of the technology into lateral surgery and just continue to elevate the precision associated with the technique. And we think that there's a ton of opportunities. They're very apparent to us. The design and development stuff is going as planned, and we'll share some information in terms of just the utility of the robotic stuff just for the sake of interest as we get through this year. But next year, I think you'll begin to see the influence clinically, which, again, will -- then there will be a bit of a drag numerically. But anyway, it's a nice tailwind that's yet to be reflected.

Operator: Next question comes from the line of Sean Lee with H.C. Wainwright. Your line is open.

Sean Lee: Hey good afternoon guys. And thanks for taking my questions. Just a quick question on the international market. So from the slides, it looks like the full launch of PTP in Japan isn't expected until 2026. So I was wondering what steps remains to be done before you can launch the product there? And also, do you plan on additional expansions internationally before that?

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Patrick Miles: Yes. I appreciate the question. The dynamic is that the Japanese market is a very careful market. And so the one historical dynamic has been that the JSSR, which is the Japanese Spine Society, opines on the regulatory clearance of companies in the market space. And we were over the JSSR recently and had a very productive meeting and very exciting. They're going to initially enable us to go in with some more conventional items. You saw that our InVictus portfolio got cleared, and we'll start to go in with that. We'll start with lateral surgery in that marketplace and our LTP will be really the first thing that garners [ph] experience in Japan. And then what they'll do is they'll slowly go in with PTP. So we're just trying to be thoughtful with regard to what our expectations are from a contribution standpoint in that market realizing that it's a very conservative market and things will go slow. What gives us great excitement is, if you look at the -- and we consider Australia such a great proxy, Australia, New Zealand, and you look at 400 PTPs being done in Australia, it just speaks to the predictability and reproducibility of a technique that gets introduced to a new market space and just our ability to ultimately garner like you don't get 400 if it's not predictable and reproducible. And so our enthusiasm to get into Japan, which is a much larger footprint. And again, a very consistent group of people as the Americans are in terms of just the procedural bent and the interest in applying procedures to pathologies and not being a widget market. So anyway, probably more than you cared for, but that's our enthusiasm, that's the drag, that's why we said 2026 on PTP. It is just going to be a methodical walk.

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Sean Lee: That’s very helpful. Thanks guys.

Operator: Next question comes from the line of Young Li with Jefferies. Your line is open.

Young Li: Great. Thanks for taking our question. Sorry, I've been hopping around on calls. But I guess the question is on the top 10 U.S. market chart. Very strong growth in two years from 2% to 6%. I wanted to hear a little bit about some of the top reasons for that growth and penetration. Is it from competitive rep hiring, so organic growth, maybe using yields to open accounts, PTP? Just want to hear a little bit of the reasons for that. And what are some of the other key strategic U.S. markets you're focused on for 2024 and 2025?

Patrick Miles: Yes. I'll provide some opinions on the markets where I feel like we're making great progress. I'll probably refrain from describing what markets we expect to be next. Probably, the other call that you were on be listening in. I'm just kidding. The -- probably -- as I look at the very, very big markets, I look at like Chicago, more organic type of a growth profile. Some clear additions of people that have made significant differences in our run rate in, say, Chicago. New York and New Jersey have been a competitive hiring scenario that has been outstanding. That was a big block of guys that came over in full in the fourth quarter of last year. They're starting to make progress, and they're going to be well suited to make a great run for a long period of time in that market. And so I would say the impact in the most immediate or apparent growth spaces of say New York and Chicago, two of the biggies, have been -- as a inorganic in New York, more organic in Chicago. I would say organic in Los Angeles, starting to see Los Angeles start to demonstrate a very organic in Houston. In Houston, it's the PTP capital of the world. The -- but no, I think we're just seeing that those people that have experience in this space, especially those that have experience in lateral have done exceedingly well. Phoenix is another market where we have really an exceptional team. And so where we have people who have bought into the thesis of the company and have engaged deeply into what we're trying to build, we are making significant progress. And I think it's reflective in the top line growth number.

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Young Li: I also think it's reflective in kind of the statistics underneath where we continue to see surge in growth, but consistent increased surgeon adoption. And I think that reflects the broadening adoption of our core lateral franchise, PTP, think about how you can apply that to more and more complex pathologies over time as you adopt that. And then you think about the halo effect. And ultimately, the impact that, that has on our ability to just not only dive deeper in a geographical area by adding more surgeons but to dive deeper within a surgeon's practice.

Patrick Miles: Yes. One last point is we have a PTP meeting coming up with more than 50 surgeons in attendance. It's oversubscribed. And it just makes me think back about several years ago when we started to talk about this and completely got dismissed by the rest of the marketplace only to be right. And it's -- I would tell you that what makes this thing fun is a group of people that have been around spine surgery for years and ultimately are applying their experiences in ways that ultimately create progress. And so we're living in a good time in this business and just can't be more excited about the opportunities forward.

Young Li: Allright. Thank you very much. Appreciate the details.

Patrick Miles: Well, I would just say thanks for your interest in ATEC. We are just getting started and it inches the tagline. So anyway, thanks so much for your interest.

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Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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