Alphatec Holdings, Inc. Q4 FY2023 Earnings Call

Good afternoon everyone and welcome to the webcast of ATEC’s Fourth 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 pro forma 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.

Thanks very much. Welcome to the Q4 2023 financial results call. There will be some forward-looking statements. I would characterize 2023 as a very good year. A few highlights include revenue of $482 million, which represents a 37% total revenue growth, and 890 basis points of adjusted EBITDA expansion. There was a 40% surgical revenue growth, with a broad contribution, and a 31% surgical volume growth compared to 25% in 2022, suggesting acceleration. We trained over 500 surgeons and focused on three key areas, beginning with lateral. We launched LTP with the ALIF Midline element and introduced expandables in lateral. From an informatics perspective, EOS has expanded significantly, and we look forward to discussing it further. We also acquired a navigate-enabled robotic system from an informatics standpoint and completed a capital raise of $150 million. Overall, it was a very productive year. We've increased our market share from about 1% to around 5%, depending on calculations. The growth rate of 40% over this period, from a compound annual growth rate perspective, reflects a 17% new surgeon CAGR and a 24% procedural volume CAGR. Surgeons are engaging with us, leading to a revenue per case CAGR of 12%, which aligns with our surgical thesis. Our priorities remain focused on earnings growth through clinical distinction. We've emphasized that surgeons adopt technology when there is clinical distinction, which also attracts salespeople. Our goal has been to create clinical distinction, particularly in the lateral segment, where we've grown from about 1% to about 12% market share. This improvement allows us to enhance utility and expand applications by addressing surgical requirements and procedural hurdles. We are integrating SafeOp to mitigate complications commonly associated with lateral surgery, enhancing the automated SSEP aspect that assesses nerve location and health. Our creation of PTP has minimized the need for posterior approaches with PLIF and TLIF, positioning our lateral franchise to address a $3 billion market opportunity instead of a previous $1 billion. This instills confidence, as excelling in lateral surgery grants us broader access to surgeons' practices—what we term the halo effect. When our salespeople successfully work with a surgeon on a lateral procedure, trust develops, allowing us to expand our surgical offerings with them. We have committed to launching approximately eight to 10 products per year, with this year being particularly significant at 15. Each product launch aims to broaden our procedural influence. In lateral surgery, the expandables stood out. Additionally, we established a foundation for future developments by launching products targeting thoracic surgery, as well as preparing for thoracic corpectomy and introducing an LTP position. We leveraged our experiences from PTP in the development of LTP, or lateral transpsoas. Access remains vital to surgeons, prompting us to develop an access system for ALIF that will integrate with procedural visions for S1 regarding LTP. From a posterior perspective, expandables contributed significantly to our launch profile this year, alongside tools for stabilizing osteoporotic bone, laying groundwork for our EOS journey related to bone quality measures. There has been notable demand for our cervical portfolio, reflecting the halo dynamic, as well as SafeOp and our biologics portfolio. It’s gratifying to see our continued launches of a demineralized bone fiber product and the integration of biologics within our expandables. Backfilling an expandable device with biologics and creating an elegant workflow are key parts of our proceduralization strategy. Our surgeon adoption effort is multifaceted, allowing us to engage more surgeons through clinical distinction and earn additional cases through enhanced experiences. The number of products sold in each case reflects our procedural thesis. Different procedures will have a varying number of products per case, which we think serves as a good proxy for our overall proceduralization effort. Distinction not only drives surgeon adoption but also attracts salespeople, making it crucial to continue enhancing our distinction. Elevating our distribution network remains a priority, and we will keep focusing on it. As mentioned earlier, we have earned approximately 5% market share. The encouraging aspect for us is that in regions where we have distribution and a sizeable network, we have reached up to 25% market share, illustrating the effective application of our portfolio. We have never been more optimistic about the marketplace. We see it as 35% disrupted and 60% apathetic, an advantageous environment for driving change. A positive indicator of our growth potential is having a 36% same-store sales dynamic, suggesting a growth rate that surpasses competitors. New partners are joining us, eager to build successful businesses with us. We are in it for the long haul, and I’m excited about what we are building. If we wanted to create a successful company, we could have stopped after establishing our lateral franchise, but our aspirations are broader; we aim to revolutionize spine surgery. Just as we built the initial part of the company around SafeOp and better lateral surgery, we are now focusing on deformity. We have built our team, acquired SafeOp, and enhanced our lateral franchise, and we see similar progress with EOS. Our informatics framework creates an ecosystem that can integrate various elements, overcoming information silos to enhance proceduralization—essentially proceduralization on steroids. By assembling tools that improve both intraoperative and predictive spine care elements, we can create a more refined surgical experience. Several years ago, I stated that the spine business needs ATEC, and I believe this now more than ever. The high revision rates, ranging from 10% to 15% in short-segment surgery and 25% to 30% in deformity surgery, indicate that spine science is unsettled. This underscores the need for an objective informatics ecosystem. The EOS Insight box illustrates that most surgeons only see a limited perspective, which can mislead them. The beauty of EOS Insight is that it offers automation for alignments, currently time-consuming and reliant on manual calculations, alongside more user-friendly software solutions. In spine surgery, decompression, stabilization, and alignment are all critical, with alignment being the strongest predictor of long-term success. The high revision rates emphasize our opportunity to introduce objective data that aligns with surgical goals. Our EOS Insight tool will enhance the quality of pre-, intra-, and post-operative information while providing automated alignment reports, surgical planning, and assessment follow-ups. Overall, we will leverage this data to create a richer ecosystem that informs better surgery and enhances our opportunity within deformity. The recent First Annual Deformity Summit, attended by over 30 deformity thought leaders, showcased the rising demand for our sophisticated tools. Our unique position in the market, with a 5% share, offers an ecosystem that informs preoperative, intraoperative, and postoperative elements, leading to better predictability. The year 2023 was outstanding, and while we have momentum, the potential ahead is even greater. We will continue to enhance our lateral sophistication through new products and broader sales outreach. Our international efforts are just beginning, with a decent year in Australia and New Zealand and plans to expand into Japan. More hospitals are granting us access based on our clinical distinction, and we remain enthusiastic about the disruptive and apathetic market dynamics. We are eager to integrate integrated navigation robotics into our lateral procedures, enhancing real-time feedback. Our EOS Insight developments are just beginning. There is significant momentum, and much more is to come. Now, I will turn it over to Todd.

Thank you, Pat, and good afternoon everyone. We appreciate your participation in today's call. I'll start with our revenue details. In the fourth quarter, we achieved total revenue of $138 million, representing a 30% increase compared to the previous year and a 17% rise compared to the prior quarter. This revenue consisted of $123 million from surgical procedures and $15 million from EOS. We saw a 34% increase in fourth quarter surgical revenue, against a challenging 49% comparison from the previous year, driven by contributions from our entire product portfolio. The growth in surgical revenue was supported by a 29% increase in procedural volume, which accelerated from a 24% increase in the third quarter. This growth reflects an increase in both the number of surgeons adopting ATEC procedures and their utilization rates. Average revenue per case grew by 4% year-over-year, influenced by a higher mix of lateral surgeries, an expanding biologics attach rate, and increased case complexity, although the growing mix of cervical surgeries dampened these gains somewhat. In the fourth quarter, EOS revenue of $15 million grew by 5% year-over-year. Looking at the full year 2023 results, total revenue reached $482 million, a 37% growth compared to 2022, composed of $423 million in surgical revenue and $59 million from EOS. Surgical revenue for the full year grew by 40%, translating to an absolute dollar increase of $120 million. Procedural volume rose by 31% year-over-year, accelerating from 25% growth in 2022, primarily due to a 27% increase in the number of surgeons using our products. Average revenue per case increased by 7%, driven by a higher mix of lateral surgeries, an expanding biologics attach rate, and greater case complexity. EOS revenue of $59 million represented a 24% growth over the previous year, fueled by sustained interest in the technology and a geographical shift towards the U.S., benefiting EOS average selling prices. Before discussing the remaining aspects of the P&L, I want to take a moment to clarify our updated definition of non-GAAP metrics. For those familiar with ATEC's transformation, you know that establishing clinical distinction has been our primary focus, leading to a significant overhaul of our product portfolio. This revamp resulted in substantial, though non-cash, excess and obsolescence inventory charges as we phased out our legacy products. To better present our core business performance during this transition, we have decided to exclude those charges from our non-GAAP cost of goods sold calculations. Fortunately, most of that transition is behind us, and the current E&O charges are now a recurring part of our business operations. Consequently, our 2024 non-GAAP financial results and guidance now include these non-cash charges in the calculations for cost of goods sold and adjusted EBITDA. This inclusion influenced reported gross profit and adjusted EBITDA by approximately $4 million in the fourth quarter of 2023. Under the previous non-GAAP definition, fourth quarter adjusted EBITDA would have stood at $6 million, reflecting a 28% drop-through on incremental revenue and surpassing the $5 million expectations set by prior guidance. For the entire year, including E&O in cost of goods sold impacted gross profit and adjusted EBITDA by about $14 million, leading to an adjusted EBITDA of $4 million under the previous definition, which indicates a 25% drop-through on incremental revenue—higher than the $3 million guidance from last quarter. I want to stress two points: First, this updated non-GAAP definition does not significantly affect the margin expansion ratios reported in 2023 or the expected future expansions. Under both definitions, 2023 adjusted EBITDA improved by 890 basis points year-over-year. Second, the E&O inventory expense, which is a non-cash charge, does not impact our goal of achieving cash flow breakeven by 2025. We have provided a reconciliation of the updated definition against previously reported periods in the appendix and in a supplementary financial filing, both of which you can access on our investor relations website. Now, moving on to the rest of the P&L results using the updated non-GAAP definition. Our fourth quarter non-GAAP gross margin was 70%, reflecting a 310 basis point increase from the previous year, primarily due to improvements in EOS gross margins driven by better service operations and pricing strategies. Additionally, the mix of surgical revenue and operational efficiencies contributed to margin improvements during the quarter. Fourth quarter non-GAAP R&D expenses were $13 million, approximately 10% of sales, compared to $11 million and 10% of sales in the previous year. This increase is due to ongoing investments in organic innovation and the Valence robotic navigation platform acquired in 2023. Non-GAAP SG&A expenses reached $93 million, about 68% of sales in the fourth quarter, a decrease from $74 million and 70% of sales in the prior year. We achieved 230 basis points of net improvement even with investments in our U.S. and international sales channels. As seen in the last few quarters, we have leveraged infrastructure and variable rate improvements to enhance our margins. Total non-GAAP operating expenses for the fourth quarter were $107 million, approximately 77% of sales, compared to $85 million and 80% of sales a year earlier, showing 270 basis points of operating leverage. Adjusted EBITDA for the fourth quarter was $2 million, around 1% of sales, compared to a $6 million loss, or 5% of sales, in the previous year, marking a 650 basis point improvement as a percentage of sales. The ongoing expansion of our adjusted EBITDA margin reflects our confidence in reaching our long-term profitability objectives. Now, for the full year 2023, our non-GAAP gross margin stood at 70%, reflecting a 220 basis point increase from the previous year. Non-GAAP R&D for the full year totaled $51 million, roughly 11% of sales, up from $39 million, representing a 40 basis point improvement. In 2023, non-GAAP SG&A expenses were $335 million, around 70% of sales, compared to $267 million, an improvement of 660 basis points. Total non-GAAP operating expenses for the year were $387 million, approximately 80% of sales, versus $306 million—showing a 700 basis point improvement compared to the previous year. Adjusted EBITDA for 2023 was a loss of $9 million, roughly 2% of sales, but improved by $29 million and 890 basis points from 2022. Our drop-through rate of incremental revenue dollars to adjusted EBITDA was 22% for the year and 26% in the second half of 2023. We have demonstrated our ability to grow revenue while making significant improvements in profitability margins and still investing in future growth. The investments in Valence and international markets accounted for nearly 110 basis points of adjusted EBITDA in 2023 and are expected to drive growth and profitability beyond 2024. On the balance sheet, we concluded the fourth quarter with $221 million in cash, and our year-end debt at carrying value was $527 million. Free cash usage totaled $51 million, with $35 million allocated to inventory and instruments that support our growing distribution network and new product launches. The adjusted EBITDA improvements are positively influencing our operating cash use, as cash used for revenue-generating assets increased in the fourth quarter due to investments in instruments and inventory needed to support our sales efforts. As stated previously, our recent funding will facilitate the acquisition of the necessary revenue-generating assets for our current and future teams. This investment is expected to provide an attractive return on investment over five years. For 2024, we plan to deploy approximately $100 million of cash throughout the year. We anticipate cash usage to be front-loaded, with a significant investment in the first quarter, tapering in the second quarter, and progressing toward breakeven in the latter half of the year. Regarding our outlook for 2024, we expect total revenue growth of 23%, resulting in approximately $595 million for the year. This includes surgical revenue growth of about 25%, reaching $530 million, and EOS revenue of around $65 million. Be aware that the EOS revenue in 2023 benefitted from a decision to exit non-strategic regions, making for a challenging growth comparison in 2024. As sales growth improves efficiency across our business, we anticipate solid profitability progress, with expected adjusted EBITDA of about $22 million for the full year, inclusive of an $18 million E&O inventory provision. Using the previous non-GAAP definition, adjusted EBITDA guidance would be roughly $40 million. We expect to see a 560 basis points increase in adjusted EBITDA margin on top of the 890 basis points of progress achieved in 2023, which positions us well for our long-term profitability and free cash flow goals. The next slides will provide further insights into our guidance for 2024. I’ll start by explaining how our expectations for procedural volume and average revenue per surgery growth influence surgical revenue guidance. Our commitment to clinical distinction has led to strong surgeon adoption and utilization rates, with surgeon user growth consistently strong at 27% in 2023. A significant but perhaps overlooked aspect of volume growth is surgeon utilization, which shows steady improvement each year. Our procedures build confidence among surgeons, encouraging loyalty and enabling them to handle more complex procedures, thereby increasing utilization. Every new surgeon partnership typically opens a multi-year opportunity for increased utilization. We expect these trends to drive 20% growth in procedure volume for 2024. The anticipated growth in average revenue per surgery is largely due to an increasing shift toward procedures requiring more products and greater complexity, which typically generate higher revenue per case than our overall average. Additionally, the rise in procedural complexity and biologics is favorable. However, the recent growth in cervical innovations may pose a slight challenge to average revenue per case due to lower average selling prices in those cases. We forecast mid-single-digit growth in average revenue per case for 2024. Now, regarding our adjusted EBITDA guidance of $22 million for 2024, this suggests a 560 basis point improvement and roughly 28% drop-through on the year-over-year revenue growth, compared to a 26% drop-through in the second half of 2023. The progress we've made and the expected drivers of leverage give us confidence in continued improvements in operating profitability. We expect the factors delivering these gains to align with the expectations laid out in our long-range plan shared in May 2022. Overall, 2023 was a remarkable year showcasing our financial execution. It was a pivotal year in our journey toward profitability, presenting us with a unique opportunity to allocate cash to high-return revenue-generating assets that will drive growth in the coming years. The profitability advancements we've made and will continue to make, along with a well-capitalized balance sheet, set us on the path to achieving cash flow breakeven by 2025 and self-sustaining growth afterward. The combination of our sector-leading growth and the resultant operating leverage is intentional. We are committed to our financial strategy and successfully executing it, setting the stage for ongoing value creation. This story of our scrappy David versus Goliath approach in the spine market is evolving into a narrative of sustainable, profitable growth. We truly believe our best days are ahead of us. This serves as a perfect transition to remind you of our Long-Range Plan Update scheduled for March 19 in New York City, where we will provide further insights into our plans for profitable growth, extending our existing Long-Range Plan by two additional years. If you plan to attend in person, please RSVP via our IR website. For those who cannot join us physically, we will also provide a webcast of the event. We look forward to seeing you there. Now, I will hand the call back to Pat.

Thanks much, Todd. I will tell you that what brings us here is our spine-focused momentum. I can't be more deliberate with regard to the value of being focused and aligned with a customer base on a very specific segment of the orthopedic market. And so that brings about 40% revenue growth. It brings about a huge opportunity for a disrupted market. It brings about growth that is profitable from a sales perspective and a lot of momentum driven by the things that I spoke to previously. So, anyway, super excited about 2023, celebrated the big year with our national sales meeting as of late. And I think we go into 2024 with significant momentum. So, with that, we will take questions.

We will now open the floor up for questions. The first question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Hey, this is Phil on for Matt. Thanks for taking our questions and congrats on the excellent quarter. I was just curious if you could provide an update on the rep hiring cadence you've seen since your last update, I guess, Q3, how much disruption is still out there. And you've talked about being under-indexed in certain U.S. geographies in the past. Any update on that front from these ads?

I would say that 94% of the market is still disruptive, just joking, it's 6%. These changes take a long time to unfold. Our approach is very methodical. We have significant areas of need and adjacent needs. We are focused on identifying where we can make the most meaningful impact efficiently, using the best talent available. This will develop over a three to five-year timeframe. I appreciate those who think it will only take 12 months, but that’s not the case. The rewards will be for those who take a long-term view. The positive aspect is that there is still much to accomplish. Our portfolio continues to grow in its distinctiveness, and I am very enthusiastic about the improvement in our portfolio, which likely features a top-tier commission rate.

And I thought that kind of reflects all of that stuff that's going on, lots of interest.

That's helpful. And I guess just on that same storyline with respect to guidance, is there any guardrails around cadence through the year as these rep hires and recent rep hires ramp and you're going to continue to hire this quarter as well. Do you expect it to ramp fairly uniformly through the year? Or is there going to be a bigger jump in the back half?

Yes, I'll let Todd speak to the numeric reflection if there is one. What I think so often happens is that revenue is a lag indicator. And it's a lag indicator of bringing people over, getting access to the hospitals, getting the surgeons familiar with the goods, but there's a lot that goes into it. And so the immediacy of the influence is somewhat muted. And so my concern always is kind of the over-enthusiastic view on someone who just comes over. If we're playing along, our view is that these guys got to help us in the years to come; we would prepare them to do so with an unbelievable portfolio with unbelievable training.

And Phil, I'd tell you, the way we constructed the guidance really was reflecting the organization that we have here kind of coming out of the fourth quarter and really allowing new rep adds to be upside to that and execution of the underlying business really driving the strength of the guide. And so I think we've set up the year well in that regard. And as a reminder, our guidance philosophy is to put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed. I think as it relates to cadence, you typically have a step down from Q4 to Q1, step up to Q2, kind of Q2 to Q3 is flattish, and then step up in Q4. And so I think that overall shape of the curve will remain. And I think fundamentally, where we land overall will really be a reflection of the underlying strength of the business as we go throughout the year.

Makes sense. Thanks so much for taking the question.

Our next question comes from the line of Matt Blackman with Stifel. Your line is open.

Hi. This is Emily on for Matt. Just wondering if you can provide some color on the training that you've had thus far this year and expect to have in terms of what you're seeing for demand versus prior years or anything on the mix of new versus existing ATEC users or lateral versus non-lateral, anything there you can help us with?

I hope I can provide some insight, although I'm not certain I will. The situation is that surgeons come here to learn lateral techniques from our exceptional lateral surgeons, and there are many of them. As a result, surgeons are inspired by what they see and are encouraged to explore our expanding portfolio of applications, such as PTP. We're beginning to see promising early results with corpectomy, which offers advantages for surgeries where patients are lying on their stomachs, as it allows control over both the front and back of the spine simultaneously. This aspect is very exciting. We're noticing a mix of returning and new interest, as reflected in the contributions from new surgeons. There's significant enthusiasm and many regions we have yet to reach, indicating that we have a good blend of existing adopters who are broadening their practices and new entrants into the market.

Okay, great. And just maybe to expand on that one piece in terms of the expanded indications for lateral. So, we've had the $1 billion bucket and the $2 billion bucket for a while. Is there any kind of traction moving into that bigger bucket? And with maybe an influx of experienced lateral surgeons that may be new to ATEC accelerate that trend?

Yes. That's a great question, and the answer is yes. As we see more new surgeons entering the field, their familiarity and comfort in navigating the retroperitoneal space, which is essential for the lateral approach, will increase. Regardless of their position, these surgeons are very comfortable with this technique. This will allow for a quicker expansion of indications. If you consider the development of our products designed for this space, we aimed to create an excellent procedure equipped with a patient positioner, a retractor, and all the necessary instruments, while also ensuring robust sophistication on the SafeOp front. We believe this will help us solidify our surgical indications. You've noticed the evolution from standard static implants to expandable implants, as well as corpectomy procedures, which highlight this advancement in surgical applications. The more knowledgeable and skilled the lateral surgeons become, the more rapidly they will adopt new techniques and utilize additional surgical indications. Previously, if there was compressive material at the back part of the spine, it typically indicated the need for a TLIF, since decompression could not be performed with the patient in a lateral position. However, the introduction of PTP creates an opportunity to perform procedures normally done with the patient in a prone position while still benefiting from the lateral approach. This is why we are excited about PTP and the trends we are observing in its utilization.

And Emily, it really makes a lot of sense when you look at that and you understand that, that kind of translates into more procedures or more products through the procedure. So, products per case goes up, revenue per seizure kind of hit some tailwinds through that. Plus, as Pat said, when they apply it to more complex pathologies, oftentimes that means either more procedures within their practice, get to use PTP or there are more levels in that procedure, both of which and all of which really contribute to this great same-store sales growth that you see because ultimately, the utilization of procedure just continues to expand and broaden the more that we offer it and the more they get comfortable with it.

Great. Thanks so much.

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

Hey, good afternoon and thanks for taking the questions. Just two for me. So, you talked about 15 new product launches and line extensions in 2023, can we expect similar things in 2024? And maybe just talk about some of the key product launches we should be at a low at for? And then I had a follow-up, please.

Yes. Thanks, Vik. One of the things I appreciate about the company is its strong capacity for organic innovation and its authentic approach to advancing the field. We have consistently aimed to launch between eight to ten new products, which include both line extensions and significant new product introductions. Looking ahead to 2024, we anticipate continuing to expand our cervical portfolio, which we believe is timely as more professionals gain confidence in lateral procedures, thus broadening the applicability within the cervical market. We want to ensure we are fully prepared for this, enhancing our sophistication in that area. Additionally, there are numerous opportunities to establish our next foundation, particularly concerning bone quality in relation to EOS and how we can integrate that into implants. Advancing our expertise in 3D printing is crucial, and you will see the introduction of 3D printed implants from us. We are excited about the potential for assembling these innovations. Another upcoming development we expect to gain substantial experience with this year, becoming more significant next year, is the integration of navigated robotics into our PTP system. When contemplating innovation opportunities, it's important to recognize that it is not confined to a single area but encompasses a combination of various components. Understanding our neurological capabilities with SafeOp alongside the navigated robotic aspect of our Valence platform creates a more comprehensive innovation strategy. Often, there is a misconception that committing to one technology will transform everything, but the spine field is characterized by many variables. Additionally, we have an expandable TLIF implant in the pipeline that we believe will perform exceptionally well. Therefore, you can expect a variety of new products that will either enhance existing procedures or elevate the complexity of procedures through the combined utility of our assembled innovations.

And the prevent from Insight is a huge addition.

Yes, we are very excited about the Insight portfolio this year. However, if you've been in this business for as long as I have, you realize that it often takes time for new products to show their value in revenue. We launch these products, introduce them to the field, and work to get hospitals to accept their pricing, but the reflection in revenue comes later. That's why we often say that revenue is a lagging indicator of the work we've done 18 to 24 months prior. I apologize for getting off track.

No, not at all. That was a great. Thank you. And just my follow-up question, you have your upcoming investor meeting in March. Any things that you kind of what we can expect at the upcoming Analyst Day? Thank you.

Yes, Vik. And I won't steal the thunder of the meeting. But fundamentally, we're going to give another two years of financial projections, very consistent with how we laid out the story in May of 2022. Obviously, we'll have some additional kind of qualitative components to that. But fundamentally, it will be an extension of our financial commitments through the year 2027.

Our next question comes from the line of Josh Jennings with TD Cowen. Your line is open.

Hi, this is Eric on for Josh. Thanks for taking the question. I wanted to focus on your opportunity internationally. I understand you guys are just getting going in some markets like Australia and New Zealand specific to 2024, what level of international contribution have you guys factored into guidance here?

So, we haven't broken that out specifically, Eric. I think you'll see us give more granularity on that type of, I guess, insight in our long-range plan update. So maybe stay tuned there. But I'd tell you that it's starting to contribute, and we're getting good growth in the Australia and New Zealand markets as they're really starting to work for us. And as Pat said, we'll begin very, very early stages to see a little bit of revenue reflection coming out of Japan later this year. Not material at all, but it will be good to start seeing that. We've really built a great team in both Japan and Australia and New Zealand, really, really starting to come on. So, I think we're very excited about the opportunity. And our experience thus far in those markets has reinforced the strategy of going narrow and deep in a very specific geographic footprint that we've laid out. So, maybe I'll leave it there unless Pat wants to add.

The organization has made considerable efforts to establish a strong foundation for future international success. This is something we are particularly proud of due to the consistent progress we are observing. Each of the different teams seems to be aligned, and as Todd mentioned, we have the right team in place, which could lead to the business outcomes we are aiming for.

That's great. And then maybe thinking about EOS. You guys have talked about the updated platform being slated for a rollout in the not too distant future here. I was just curious to your expectation for that launch? And maybe how many systems you think you could have in the market exiting 2024? Just any sort of launch metrics that we could be expecting would be great. Thank you.

Yes, I won't provide any launch metrics, but I will say that everything is on track. I may not have mentioned the regulatory clearance in my presentation. We identified some obstacles, and they are on us. So my main point is that we should stay on schedule. I believe there will be significant demand, but the challenge with capital equipment is securing funding, preparing the space, and setting up the equipment. While we are enthusiastic about the technology, we need to be mindful of the practical challenges in implementing these systems. The technology is exactly as we anticipated, and the automation is being integrated into our workflows as expected. This will lead to a more advanced field. All of this is set for Q2 2024 as promised, but the impact on unit volume in the field will manifest over the coming years.

Understood. Thank you for taking the questions.

Next question comes from the line of Brooks O'Neil with Lake Street Capital Markets. Your line is open.

Thank you. Good afternoon. I just am kind of intrigued by this notion that you have 25% market share in some markets, but 5% overall in the US spine market. And I'm just hoping you could talk a little bit about some of the keys to getting to that 25% in the markets where you have it to whether you're confident that you can get to 25% in the markets where you don't? And are there any structural obstacles to achieving the big share in some key markets around the country now? Thank you.

That was a challenging question, Brooks. I would say the features associated with those who have a 25% market share often indicate that they have entered a key market segment through lateral surgery, which has then gained traction among partners. This has fostered a competitive environment for others to follow our lead. There are impressive statistics that show if you have a significant lateral business as one of our distributors, the chances of achieving growth above 40% are strong. This ultimately correlates with the 25% market share in their specific regions. I believe this forms the foundation of our success. Many individuals who have previously worked with us have successfully established the business and benefited from the positive influence of our brand. Additionally, those who have recently joined us in regions focused on EOS will likely expand their lateral offerings and enhance the EOS installed base. So when you inquire about long-term growth obstacles, I would assert there aren’t any significant ones. Our business is intriguing, considering the unique demographics in each region. Change tends to be slow among them, and we strive to provide ample motivation for that change. Our perspective is that the broader we can spread EOS informatics, and the more information we can deliver to enhance predictability, the more people will choose us. This is why I think our strategy of prioritizing lateral procedures first, followed by EOS, will be beneficial. Ideally, in ten years, the focus will shift away from individual products, and all discussions will center around procedural advancements. We believe that this procedural opportunity, informed by EOS and a growing sophistication from the information provided to surgeons, will lead to improved outcomes. These better outcomes will ultimately lead to a more successful day. This is how we are approaching it and how we perceive it is unfolding. I hope that adequately addresses your question.

So that was great, Pat. I really appreciate that. Just tack on one tiny a little bit more is not to be greedy, but does deformity give you an opportunity to grow your share in some markets even beyond the current 25%?

Yes. I think it's truly a great question, Brooks. Why do you see this being somewhat of a stodgy environment, as you see so many places that have committed to a provider for long periods of time? And so to unseat those providers in a long period of time, you have to do something that's unique. And so the deformity market is a big market. And the reason why the numbers kind of get a little wonky is because it's not as though there's a lateral market and then there's a deformity market. There's tens of collateral is used in deformity. But let's just say, it's a very large market. and the ability to ultimately participate in that market is a sign of sophistication. And so oftentimes, if you do the complex things well, you can do the more things well. And what's happened is, there's been companies that have long been in this business that have established themselves as deformity providers. We believe that deformity is best approached from an assembly of goods, much like we have with regard to lateral. It's a different assembly of goods. But the opportunity for us to do a patient positioner in idiopathic scoliosis, where there's a curve that's more flexible, we think is opportune. We think neurophysiology in terms of automating it with regard to facilitated MEPs and even using automated SSEP is valuable in those cases. And then understanding rotational deformity with regard to EOS. When you start to assemble all of those things that suggest to us a procedural requirement. And that's where I think people have historically used gestalt. I'm so experienced in this field that I can do it. Our view is how do we provide objective information that ultimately drives behavior. And that's where we think that once that starts to become more commonplace, our ability to reflect an influence in that market is high.

Hi. Pat. Hi, Todd. Congrats on the quarter. Thanks for taking my question. I wanted to start on lateral specifically for LTP. So for a doctor who's doing ALIP or sorry, XLIP is LTP the path of least resistance from an ATEC product perspective? And if so, how has that launch resonated with kind of doctors? Is that where you're seeing the most traction in that cohort?

Yes, absolutely. As someone who was in Sao Paulo in the early days of XLIF, I realized the importance of having product development and marketing teams that truly understand the needs of the market. What you are seeing is that while we clearly state that PTP represents the next generation for lateral or expo procedures, there are still numerous applications where LTP remains highly valuable. We have integrated insights from XLIF and previous years, as well as from PTP, which are now reflected in the way we approach patient positioning. In 2024, people may still be guiding others to beds and suggesting that there are no further options left in spine surgery. There is a chance to emphasize that as a monitoring company, we may only indicate where the nerve is, but the monitoring is less helpful thereafter. Many patients continue to experience side pain due to plexopathy because of the retraction of the Plexus. There are numerous opportunities to enhance these procedures, and we believe we are making significant progress with respect to the technology we are developing for lateral surgeries. When surgeons try out the collateral innovations, they perceive them as the next generation of products.

Okay. Great. Super helpful. And then I just wanted to clarify something, Todd, I think you said in the script, for the OpEx cadence, did you say it was supposed to be kind of front-end loaded higher in the first and second quarter? I just want to make sure whether I heard that correctly or not. Thank you so much.

My comments were focused on the cash flow pattern throughout the year. We have stated that we plan to invest around $100 million in cash this year for sets and inventory, which are the revenue-generating assets that will ultimately meet the needs of our sales team. We've already made some of those investments, particularly noticeable in the fourth quarter. In the first quarter, our cash burn will increase compared to Q4, then decrease in Q2. By the second half of the year, we expect to approach cash flow breakeven. This is the cash burn progression we anticipate for the year.

Thanks for taking the question.

Next question comes from the line of Drew Ranieri with Morgan Stanley. Your line is open.

Hi, Pat and Todd. Thanks for taking the question. And apologies if this has been covered already. But on balance, could you give us an update on how you're thinking about development for the product? And with more competition coming potentially in 2025, just remind us how you're thinking about differentiation of your system, especially as maybe more spine procedures are starting to move towards the ASC? Thanks for taking the question.

Thank you, Drew. I am very excited about the developments happening with Valence. We are gaining experience as it's being utilized, which aligns with our expectations. Utilization is set to grow. The year 2024 will focus on evaluation and verification as it will be used in a conventional manner, similar to other robots, mainly for placing screws. The 2025 launch will be a confirmed tool that effectively integrates into our workflow, particularly in PTP. The integration of neurophysiology with navigation will be remarkable, ensuring that we can identify the bones, nerves, and the health of the nerves—all essential aspects. One of the advantages of PTP is that we have control over both the front and back of the spine, which allows us to navigate and manipulate both simultaneously. You will start seeing this in 2025, presenting a unique opportunity for us to navigate multiple elements at once in the coming years. Regarding Ambulatory Surgery Centers (ASCs), it's important to note that many are surgeon-owned, and I have rarely encountered surgeons eager to invest in expensive capital. Therefore, we've designed a system that facilitates the use of navigation robotics in a procedural manner. Bringing everything to the service site is manageable for us, as our focus is solely on the success of the procedure and the elements needed for predictability. Our excitement about ASCs remains high since our products require minimal space, allowing us to perform critical surgeries effectively in an environment with limited enthusiasm for capital investment. This reflects our current strategic perspective.

Got it. And maybe just one more. I don't think this was discussed, but can you talk to us about your thoughts on competitive rep hiring in your 2024 guidance and what role it might play in any additional hires you made or will make beyond 2023? Lastly, could you remind us of your sales force headcount for year-end?

Drew, this is Todd. As we outlined our guidance for 2024, we considered the organization we would have at the end of the year and our run rate. This led us to reflect on our exit rate for 2023, which informed our 2024 expectations. Our guidance is a reflection of the fundamental aspects of our business and the organization we have established. As you know, our current efforts often influence revenue 12 to 18 months into the future. We believe that as we onboard more competitive sales representatives and if the business performs better than anticipated, that could create potential upside to our guidance. However, we are focused on setting guidance that we believe is attainable, with a reasonable chance to exceed it. The opportunity to exceed expectations would likely come from volume and the core business, as well as the additional representatives brought on throughout the year. In terms of our total sales force, we're looking at low to mid-300s. So that's essentially where we stand.

There are no further questions at this time. Mr. Miles, I'll turn the call back over to you.

Thanks very much, Debra. And really just thanks, everybody, for your interest in ATEC. We are in this for the long haul, clearly, and we can't be more excited about the momentum that was created in a great year in 2023. Thank you very much.