Alphatec Holdings, Inc. Q1 FY2024 Earnings Call

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.

Thanks much, Desiree, and welcome, everyone, to the Q1 2024 financial results call. We will be making some forward-looking statements, and I encourage you to review those at your own convenience. Let’s quickly recap the highlights from Q1 2024. We are laying a foundation for profitable long-term growth. Total revenue reached $138 million, reflecting a 27% increase; adjusted EBITDA expanded by 450 basis points; surgical revenue grew by 30%; surgical volume increased by 23%; and average surgical revenue per case rose by 6%. From an adoption standpoint, we trained 150 surgeons in the quarter, leading to a 21% rise in surgeon adoption. We continue to invest in revenue-generating assets, supporting a market that is either indifferent or facing disruption. Without an increase in asset volume, it’s challenging to support a market that clearly needs ATEC. We deployed $60 million to empower a growing sales team to cater to an expanded surgical volume. Regarding the sales team, we are confident about our growth trajectory, particularly in our established territories, which saw a 28% growth in same-store sales. This is an encouraging statistic. We often emphasize that the spine market needs ATEC, and that we are distinct in our approach. One key factor in our uniqueness is our complete focus on spine. Like our surgeons, we concentrate solely on spine. This spine-only focus translates into our expertise. When we mention expertise, we refer to our advanced mechanical imaging, navigation, and neuromonitoring skills. With this expertise, we create clinical distinction, which drives adoption from surgeons and attracts salespeople who want to align with our mission. We understand that surgeons look for a comprehensive approach to procedures rather than just products. Thus, we develop fully integrated spine procedures from the ground up. Spine surgery involves managing numerous variables, and we believe that objective measures through informatics can enhance the management of these variables. You will find us to be a purposeful team. We often say our best is still to come, and this is not just a slogan. The company's growth drivers demonstrate abundant opportunities. Our involvement in lateral surgery has been the key driver of our business growth. Additionally, factors like EOS informatics, Valence, international outreach, and the U.S. sales force are all contributing to our strategy. Progress is on track, and we remain optimistic about sustaining this growth. I'd like to quickly update you on each area to provide insight into our perspective. It's important to note that lateral surgery is a highly sought-after submarket in the spine industry, making our leadership in this area crucial. It is outpacing overall spine market growth, supported by 500 peer-reviewed publications highlighting its advantages. Our team pioneered lateral surgery, granting us a deep understanding of the technique and its requirements, allowing us to make a significant impact. Our commitment to lateral surgery remains strong as it will continue to drive growth. Originating this technique gives us a clearer insight into its needs, and we know that automated neuromonitoring is essential for lateral procedures. When considering the anatomy relevant to lateral surgery, it's crucial to understand that the primary concerns for surgeons are the femoral nerve and the nerve plexus. The space between the skin and the spine involves these nerves. In developing lateral surgery, we initially used electromyograms (EMGs) to pinpoint the location of the nerve, which was essential information. The next question is whether we can evolve this technique to not just locate the nerve but also to monitor it over time. Identifying the nerve’s location utilizes EMG, whereas monitoring it over time employs somatosensory evoked potentials (SSEP). A key aspect of Alphatec Spine's approach is our ongoing commitment to enhancing neuromonitoring. We have automated not only EMGs but also SSEPs, which clearly addresses the main concerns of surgeons. This is evident when examining the complication rates associated with lateral surgery, particularly those related to neuro complications. Improving in this area requires a clear focus on the specific challenges tied to the surgical approach. It's interesting to examine the historical leadership, which has largely been shaped by neurophysiology. However, the leadership in lateral surgery has not progressed. The same monitoring technology that a leading market player uses today was the same as what was utilized back in 2003. We see a clear opportunity to set ourselves apart in this area, which is why we are optimistic about our continued growth. Our growth trajectory is no accident. SafeOp forms the basis of our technique, reinforcing our confidence as we move forward. The reason other companies have not pursued advanced methods in spine neuromonitoring is that the process is extremely challenging. SSEPs represent very subtle signals, and discerning them amidst other electrical activity in the operating room is particularly difficult. This complexity protects our algorithms from a patent perspective, as they are intertwined with the proprietary knowledge of the company. We have the four leading experts in neuromonitoring design and development in the industry, as well as over 60 neuromonitoring specialists dedicated to advancing our technology. We have published 11 peer-reviewed clinical studies on SafeOp, along with 52 granted patents and 45 pending patents related to SafeOp globally. Our depth of knowledge in this field is substantial, and we have safeguarded this area because we recognize its significance. 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 Valence, which is our navigation robotic platform that will ultimately elevate precision. It includes evolving our SafeOp platform with automated MEPs, which will give a better understanding of motor evoked potentials and kind of the motor health of the nerve during the surgery. It also broadens our indications. When surgeons begin using a new technique, they often start with the simplest applications. The strength of our growth moving forward lies in our ability to expand into areas like corpectomy and making a greater impact in deformity correction. The chance to continue growing in this field is evident to those experienced in this industry. Another factor driving our growth is the market size; we are making significant strides in the lateral market, where we estimate our market share to be around 12%. Additionally, we are expanding our influence in ways that are seeing PTP being used in procedures that traditionally relied on more posterior approaches. As a result, the TLIF and PLIF markets are experiencing disruption due to our contributions to lateral surgery with PTP. 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 tool's relevance in surgery, and that's happening as we speak. Insight is a new feature set that will enable all the capabilities of automated surgical alignment and automated surgical planning. We will incorporate patient-specific implants, facilitate data reconciliation in the operating room, and ultimately enhance assessment and follow-up efforts. This will lead to the gathering of data that is currently in progress but not fully recognized. Recently, we obtained a high level of trust at a station that allows for data storage and sharing of de-identified data. We are the only company that automates and captures standardized images and clinical data, which we believe will enhance patient care. We think this will lead to greater predictability. EOS also serves as a significant advantage, as it is a technology that is extremely difficult to replicate, and we have nearly 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, SafeOp is to 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 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 correlative 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 to create 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 2 places that will be affected from an interoperative perspective are 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 integrate it 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 tack that we've taken. Australia and New Zealand are 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 attend, 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 covet that market. We're super excited about that market. We have our poster fixation cleared in that market. We have Dr. Pimenta who's 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/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 1/3 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 are a ton of opportunities. There's a ton of local opportunities. We're making progress locally. We so covet 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 2 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, 2,000 basis points of margin expansion and cash flow breakeven in '25.

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 influenced 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 adopting 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, its 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 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 asset 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 forecasts over $200 million of surgical revenue growth and inflection to positive adjusted EBITDA. Over these 2 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 '25 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, and 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 6 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 in 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-through in 2023. The degree of progress that we've already delivered with drivers of expected leverage contributing as planned gives 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 be 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 5 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 the integrity of demand for ATEC clinical distinction. We are the most differentiated, most spine-focused pure play in 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.

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 into 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.

The first question comes from the line of Joshua Jennings with TD Cowen.

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 6 to 12 months. But one, maybe just help us think about ATEC's share in deformity. Maybe 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 is to the deformity procedure. Just one on performing procedures and ATEC's future share taking. And then I have one follow-up on EOS.

Yes. Josh, I think the opportunity to influence deformity is very apparent and opportune. 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 room based upon the information delivered. And then just the ability to take that information and have the exact image post-operatively, 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. We are a small player in the larger deformity landscape, but we believe this tool positions us prominently in both adult and idiopathic cases. While we have significant work ahead in developing our implant systems in this area, we are making progress and see opportunities for growth. From an EOS perspective, it is the most sought-after tool in the industry. Overall, our implants are performing well, and I believe we can become exceptional. We have the capability to achieve greatness. I see SafeOp as a promising development, especially when considering the challenges posed by idiopathic deformity today. The ability to facilitate processes without needing voltage to test the motor elements of the cord, and assessing them without interrupting surgery, offers considerable advantages. In both adult and idiopathic cases, there are substantial technological opportunities for us to stand out. Our research-driven team typically does not make changes easily, but I am confident that our technology portfolio will drive us forward.

Great. I have a follow-up question on technology. Can you update us on the development process of the interop alignment and automated reconciliation tool? Based on one of the slides, it seems there might be a prototype already in use, but I'm unsure. How crucial is this technology to your operations? Where do you currently stand in its development? It appears to be the only component of the EOS Insight platform that isn't FDA-cleared, but I could be misinterpreting the slide.

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.

Our next question comes from the line of David Saxon with Needham.

I'd like to discuss the competitive positioning you've observed over the past few quarters, particularly regarding the leakage in territories covered by those competitive representatives. How effective has cross covering been in regions affected by non-competes? Additionally, can you provide any updates on hiring from the last disclosed figure of 50 in mid-March? Lastly, for Todd, was there any impact on selling days in the quarter?

I'll start off and then I'll let Todd. I hate to say clean-up, but he'll provide precision. 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 forth 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, instrument, and procedural perspective. And so there are a lot of things to bring to bear. 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.

And David, I would like to add to that. We are clearly seeing the impact of the hires we’ve made, which I mentioned in my prepared comments. It’s evident that these hires are having the expected effect. Each situation is unique, so there’s some variability from one region to another, but nothing outside what we anticipated. Everything is going very much as planned. In line with Pat's point, there's tremendous interest, as evidenced by the major players visiting our facility. We believe we are executing the plan as we laid it out, and there is much more to come as we look ahead. 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 2 days more than Q4.

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

I’ve been on several calls, so I apologize if this has already been discussed. Could you share what trends you observed during the quarter in relation to patient volumes? I also have a follow-up question.

Yes, this is Pat. I think we experienced a fairly consistent flow throughout the entire quarter. There were some vacations towards the end of March, but they didn't significantly impact the overall activity. Overall, it felt very normal.

Felt good, Vik, in a way. 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.

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.

Yes, definitely. Our overall revenue growth is 25%, totaling $601 million. We expect to maintain this average growth in Q2 and Q3, with some variations. In the first quarter, we exceeded our expectations relative to EOS, mainly due to a timing shift from Q2 to Q1. Regarding profitability, we raised our adjusted EBITDA guidance from $22 million to $23 million, reflecting 570 basis points of margin expansion for the full year compared to 450 basis points previously. In the first half of the year, we anticipate margin expansion to be approximately 100 basis points lower than the full year, around 450 to 500 basis points, while the second half should exceed that figure by about 100 basis points. Overall, we expect total margins to be in the range of 650 to 700 basis points. In terms of adjusted EBITDA dollars, we anticipate being close to breakeven in the first half, with further gains in the second half. This outlines our expectations for the timing of revenue and profitability as we progress through the year.

Next question comes from the line of Caitlin Cronin with Canaccord Genuity.

It's George speaking on behalf of Caitlin. I wanted to explore EOS guidance further. While you increased your full year guidance, could you provide more insight into why you maintained your EOS revenue outlook, especially considering the strong quarter we observed, particularly with the Insight launch? Could you also discuss how much of this is based on expectations and if there's potential for further upside? I have one follow-up after that.

Yes. I guess I'll start off. The one thing that's an unadulterated truth in capital equipment is there's a lag. And what we haven't done is pre-sold 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.

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 one-time 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 2 or 3 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 million going into the year and then the performance we had this year, keeping it $65 million, 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.

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 EOS users are currently using robots and competitors?

Yes, that's a difficult question. Our customer base generally reflects the broader audience of robotic users. We have always had a somewhat different perspective on the perceived value of current robotics. The optimism around our Valence strategy lies in the integration of technology into lateral surgery, which will enhance the precision of the technique. We see numerous opportunities, which are clear to us. The design and development are progressing as planned, and we will provide updates on the utility of the navigation robotic systems as we advance through this year. However, next year, we expect to see the clinical impact, although this may result in some numerical drag. Nonetheless, it represents a positive momentum not yet captured in our results.

Next question comes from the line of Sean Lee with H.C. Wainwright.

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 remain to be done before you can launch the product there? And also, do you plan on additional expansions internationally before that?

Yes. 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 at 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 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 excites us greatly is looking at Australia and New Zealand as excellent examples. The fact that there are 400 PTPs being conducted in Australia indicates the predictability and reproducibility of a technique introduced to a new market. This demonstrates our capability to achieve results, as you don't reach 400 without predictability and reproducibility. Our eagerness to enter Japan, which has a larger market and a consistent approach similar to that of the Americans in terms of procedural interests, reflects this enthusiasm. We believe this is why we project 2026 for PTP, as it will be a careful and measured approach.

Next question comes from the line of Young Li with Jefferies.

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 2 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 EOS 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 '24 and '25?

I'll share some insights on the markets where we are making notable progress. I won't go into detail about which markets we anticipate will be next. Looking at larger markets, Chicago stands out with a more organic growth profile, largely due to key personnel contributions that have positively impacted our run rate there. New York and New Jersey have fostered a highly competitive hiring environment, which has been impressive. A significant group joined us fully in the fourth quarter of last year, and they are beginning to show progress, positioning themselves for sustained success in that market. Therefore, the immediate growth areas, specifically New York and Chicago, exhibit differing growth dynamics—New York's growth leans more towards inorganic, while Chicago's growth is primarily organic. Los Angeles is also starting to show signs of organic growth, and Houston remains outstanding with its strong local expertise. We've seen that individuals with experience in this field, especially in lateral movements, have thrived. Phoenix is another market where we have a strong team, and where our personnel have embraced our company's vision and engaged meaningfully in what we're building, we are seeing substantial progress, which is reflected in our top-line growth numbers.

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.

Yes. One last point is we have a PTP meeting coming up with more than 50 surgeons attending, and it's oversubscribed. This reminds me of several years ago when we first started discussing this and were dismissed by the rest of the market, only to be proven right. What makes this exciting is the group of people who have extensive experience in spine surgery and are using their knowledge to drive progress. We are in a great time in this business, and I'm truly excited about the opportunities ahead. Well, I would just say thanks for your interest in ATEC. We are just getting started, and it isn't just a tagline. So anyway, thanks so much for your interest.

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