Alphatec Holdings, Inc. Q3 FY2025 Earnings Call

Good afternoon, everyone, and welcome to the webcast of ATEC's Third 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 these 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 very much, Lacie. Appreciate it. Welcome to the Q3 ATEC financial results conference call. As usual, there will be some forward-looking statements, so please read that at your leisure. I want to take a moment and put into context what we are building here at ATEC. I will tell you, there are very few public medtech companies, I believe, less than 10, that are over $500 million in revenue, meaningfully profitable and growing over 10%. Our results and guidance suggest that we are not only in that club, we are leading that club with top line growth of 30% while approaching a run rate of $800 million in revenue. My point is that we are becoming the company that we intended. And what I want to do is ensure that these things don't happen by happenstance, and they happen because of a bunch of committed people. I want to thank those who supported and have been part of the mission and also remind everybody that we're just getting started. There is much to do. I want to speak to why we are so uniquely positioned for a very long run. The key is we're 100% spine-focused. We make decisions every day purely on spine. We are leading through proceduralization, which means that we're advancing lateral, reflected in convoyed sales, applying that thesis across the board. From a deformity perspective, we're in the infancy of our role or influence on that market space, driven by EOS and EOS Insight. We've built an infrastructure that's going to last us a very long time. I look forward to describing more about that. From this point forward, what you'll see is durable, profitable sales growth. Just to share a couple of statistics from Q3, we grew at 30%. We had an adjusted EBITDA of $26 million, which is 13% of revenue. We improved by 840 basis points and turned in a free cash flow of $5 million. The total revenue was $197 million. The surgical revenue growth was 31%. Something that I'm totally excited about is the same-store sales, revenue growth in established territories was 30%. It tells you that there's demand in what we're doing. New surgeon users were 26%. We have plenty of cash access at $216 million. Our trailing 12 months adjusted EBITDA is $81 million, and we are generating cash on a trailing 12-month basis, which feels great. I will turn the detail over to Todd and be back with you after his comments.

Well, thank you, Pat, and good afternoon, everyone. I'll begin today with the third quarter 2025 P&L highlights. Total revenue was $197 million, up $46 million and 30% compared to the prior year period, up $11 million sequentially from the second quarter of this year. The $197 million in revenue comprised $177 million in surgical revenue and $20 million of EOS revenue. Third quarter surgical revenue of $177 million grew 31% compared to the prior year period and was up sequentially by 5%. That represents $41 million in year-over-year growth. Procedural volume growth of 28% was driven by strong surgeon adoption, where we increased our net new surgeon users in the third quarter by 26%. Procedural volume growth reflects both an increased number of surgeons as well as earning a greater share of an existing surgeon's business. We see this happening as our procedures are used across a broader set of pathologies and as surgeons adopt more of our portfolio offerings like cervical or corpectomy. Since we first began reporting on new surgeon users in 2022, we have consistently added at least 19% net new surgeon users each quarter over the past 3 years. This surgeon adoption reflects both the attractiveness of our portfolio and the coordinated investments in sales talent to meet that demand. Average revenue per procedure grew 2%, consistent with our expectations. Procedurally, we saw strong revenue contributions from our lateral and cervical solutions and are beginning to see measurable influence from our deformity offering. Same-store sales in the U.S. grew 30% year-over-year, showing we continue to grow significantly in the markets where we are already established. Our strong surgeon adoption, increased utilization, and same-store sales growth results are a testament to the durability and consistency of our revenue growth algorithm. EOS revenue increased to $20 million in the third quarter, up 29% compared to the prior year period. Demand in the U.S. market, where we have a strong presence with our implant sales force, continues to be strong and the biggest driver of growth in both deliveries and new orders. This, along with a growing number of surgeons using EOS Insight, positions us to see the benefit of the accompanying implant pull-through in the coming years. Turning to the remainder of the P&L, third quarter non-GAAP gross margin was 70%, flat sequentially and up 80 basis points compared to the previous year, primarily driven by product mix and volume leverage. Non-GAAP R&D was $15 million in the third quarter. R&D investment was up year-over-year by more than $2 million and up sequentially by $1 million. Non-GAAP R&D expense was approximately 8% of sales in the quarter, with top line growth driving 90 basis points of leverage year-over-year. R&D is an area where we continue to see opportunities to invest in innovation that will drive future growth. Given the scale of our business, we can make these increased investments and generate EBITDA leverage without sacrificing the growth opportunities. Non-GAAP SG&A of $112 million was approximately 57% of sales in the third quarter compared to 67% of sales in the prior year period. SG&A grew by 11% year-over-year compared to our 30% increase in revenue, which drove 980 basis points of improvement. The combination of foundational infrastructure investments, improved variable selling expenses, and being very deliberate in new headcount additions accounts for about 2/3 of the improvement. We reported total non-GAAP operating expense of $127 million, about 65% of sales. Our operating expense investment reflects continued prioritization of strategic growth initiatives supporting sales expansion and new product development. We continue to improve as an organization, and the disciplined prioritization of these investments, along with our durable top line growth, drove over 1,100 basis points of expansion in our operating margin year-over-year. Adjusted EBITDA was a record quarter for us at $26 million or 13% of sales, delivering 840 basis points of improvement compared to the prior year period. This quarter also marks our fourth consecutive period with over 40% drop-through on a year-over-year revenue growth to adjusted EBITDA. The discipline in headcount additions and the other investments we make has served us well and will continue to be foundational in driving profitable sales growth. Our trailing 12 months of adjusted EBITDA now sits at $81 million and 11% of revenue. We are generating meaningful margin expansion that aligns with the priorities outlined in our long-range plan and as a result of disciplined execution. These deliberate results give us confidence in our ability to continue to deliver on our financial commitments and translate revenue growth into profit and cash flow. We are committed to driving profitable sales growth. Now turning to the balance sheet. We ended the third quarter with $156 million in cash on hand. Additionally, we had access to $60 million of available borrowing on our revolving credit line, which was undrawn at the quarter end, making our total cash and available cash $216 million. Our positive free cash flow of $5 million was again at the favorable end of the $1 million to $5 million range we previously communicated. We generated $14 million in cash from operating activities while we continue to invest in surgical instruments. Looking into 2025, we had forward invested in instruments and inventory, the revenue-generating assets of the company. This year, you've seen how our revenue has grown and how we've become more asset efficient. We are growing in absolute dollars more than we ever have in our history, and we are doing it more efficiently. This efficiency is a result of the relentless execution of the plans we put in place. The evidence of the company's inflection to cash flow generation is undeniable, with our trailing 12 months of free cash flow turning positive for the first time in company history. The third quarter also marks our second consecutive quarter with positive free cash flow. Looking back at the past 4 quarters, we've now delivered positive free cash flow in 3 of the 4. With our consistent profitable growth and cash generation and a strong balance sheet, our financial position has never been better, and we foresee opportunities to begin deleveraging our balance sheet in 2026. Given the momentum in the U.S. surgical business in the third quarter and a healthy underlying spine market, we are raising our full-year revenue guidance by $18 million to $760 million. Our revenue outlook for the full year 2025 expects adoption of our unique procedural approach to drive surgical revenue of approximately $684 million, and we expect EOS revenue of approximately $76 million. Our surgical revenue guidance raise is a result of overperformance in case volume, which we now expect to grow in the low 20% range year-over-year. We expect case ASP to grow in the low single digits year-over-year. As for free cash flow, our third quarter and trailing 12-month performance reinforce our confidence in delivering positive free cash flow for the full year 2025. We expect fourth-quarter free cash flow to range from positive $6 million to positive $8 million. For the full year 2025 adjusted EBITDA, we expect sales growth to continue to leverage the infrastructure we have built, contributing to an adjusted EBITDA of $91 million, an $8 million increase from our prior guidance of $83 million. Our adjusted EBITDA guidance includes absorbing the impact of expected tariffs in the second half of the year, and we continue to estimate the impact of tariffs on our cost of goods sold to be in the low single-digit millions for the full year. Our adjusted EBITDA guidance of $91 million will generate an adjusted EBITDA margin of 12% for the full year. Our current guidance implies a 200 basis point improvement compared to the 10% adjusted EBITDA margin we guided to at the beginning of this year. Given the profitable revenue growth we've generated this year, we can now self-fund the investment in instruments and inventory to support our future revenue growth. We are well positioned to meet or exceed our 2027 financial commitments of $1 billion in revenue, 18% adjusted EBITDA, and $65 million of free cash flow. The third quarter financial results are another step towards delivering on our commitments. We are delivering durable revenue growth, strong profitability improvement, and seeing all of that translate into free cash flow. This team has made meaningful improvements in how we operate the business. You can see that clearly from the financial results. Most importantly, we are helping surgeons perform better surgery, and that is where we will remain laser-focused because it is the foundation for creating lasting value. With that, I'll turn the call back over to Pat.

Well said, Todd. I would tell you that our execution has been absolutely consistent across the strategy, and our strategy hasn't changed. It remains steadfast. We are creating value through clinical distinction, which compels surgeon adoption, and we continue to just get better from a field perspective. And so this is hugely exciting. We like to say around here that the spine market needs ATEC. I've never been a bigger believer in that view since I started. You have to realize the spine field is highly complex. The type of revision rates or extensions of previous surgery are unacceptably high, creating nothing but opportunity. The volume of variables that need to be addressed to drive success in spine has significantly increased due to a deeper understanding of the field. Historically speaking, investment has been overly focused on flawed implants, which is the currency of the business versus focusing on the requirements that ultimately drive outcome improvement. Our view is that the industry needs a focal leader obsessed with mitigating variables in spine, and we are it. We began down that road clearly through lateral surgery. A key to variable mitigation is the architecture of spine procedures, which we call proceduralization. Lateral surgery is a great example of that demonstrated success. However, we are in our infancy regarding our footprint with lateral. There are multiple catalysts ahead. First, there is an expanding set of indications, often synonymous with new products. We have multiple new products forthcoming, including a mechanized arm and IdentiTi II. We've just launched corpectomy, allowing us to address more pathology as we continue to improve in lateral. Another catalyst is the integration of technology that ultimately expands user reach. Our informatic platform, EOS, provides objective alignment measures and bone quality. Valence shows us where we are in space. SafeOp informs us of nerve location and nerve health. Having been at this for a long time, there is no competitor close to our level of sophistication in the coveted lateral market. Our next foray is into more data-driven decisions, and I look forward to the day we can inform the field about the best procedure for respective pathologies. There's still a lot to do on this front. Historically, proceduralization referred to lateral. We have recently applied that effort to our entire surgical portfolio with significant success. We used to always talk about the halo effect—confidence created through our lateral portfolio would result in the use of our less differentiated cervical portfolio. That is no longer the case. Our cervical portfolio now stands on its own merit. Thanks to our proceduralization effort, there's little we can't accomplish in the cervical spine—from elegant segmental surgery with our best-in-class access in IdentiTi II to complex corpectomy and revision procedures. Lastly, I want to highlight SafeOp; the information it provides from an automated SSEP and MEP perspective has expanded its application in this domain. Our momentum has just begun, and it's a significant deal. I want to emphasize we are also in our infancy in accelerating deformity—our deformity inserts through EOS integration. Similar to lateral and cervical, our progress in deformity is just starting, and we've launched AI-driven alignment for pre-operative assessment. Our planning platform simulates surgery, providing patient-specific implants to correct deformities, confirming the plan postoperatively to verify whether we achieved our intended outcomes. The literature is clear: surgeons are more likely to reflect on achieved goals if they pre-plan. Our pre-planning software is best-in-class, reflecting the highest quality. For deformity, we have the most coveted imaging—biplanar low-dose standing images—a well-accepted and desired format. Automation of alignment measures creates 3-D models. Having that in idiopathic scoliosis adds immense value. Correcting a curve pre-operatively while using our best-in-class fixation showcases our capability. Another key catalyst soon is the Valence system, expected to unlock increased adoption, supporting efficiency and accessibility for surgeons. We consider technology integration vital. This strategy is purpose-built for spine procedures and compatible with existing 3D imaging systems. The small footprint and efficiency makes it valuable. The first utility with Valence will be within our proprietary PTP procedure in Q4, with its real influence expected by 2026. Our ecosystem, built over the long run, is currently unmatched competitively. We believe spine surgery will improve through data-driven decision-making. I would characterize our evolution over eight years into three chapters: foundational investment years (2018-2020), infrastructure build (2021-2023), and profitable sales growth (2024 onward). Looking back, we had an amazing team, overhauled the portfolio, acquired SafeOp, and expanded our distribution. Moreover, investments in internal systems and expansion have all led to the current success. Leveraging infrastructure and integrating technology with informatics enhances our surgical experience while expanding our international market. In summary, what makes us uniquely positioned is our 100% spine focus. Everything we do revolves around spine, and we're succeeding. Our perspective on advancing proceduralization—from lateral to cervical and now deformity—indicates our leadership is in its infancy. EOS is a key driver for success. Our infrastructure is built for a successful long run, and we are excited about our capacity to scale our profitable growth. You'll see durable, profitable sales growth, making us a preferred destination. With that, I will open the floor for questions.

The first question comes from Vik Chopra with WF.

Congrats on a nice quarter. A couple of questions for me. Maybe just first starting off on the cash flow. Just talk about how you see next year playing out from a cash flow perspective given the strength over the last 2 quarters? And then I had a follow-up, please.

Yes. Thanks for your question, Vik. I think our cash flow expectations for next year are probably in the $20 million range on free cash flow. Our path to $65 million of free cash flow next year seems achievable given the revenue growth and EBITDA drop-through. Considering the guidance, that appears to place us in the $20 million range. We're not giving guidance at this point, but that’s a good spot to consider.

Great. And then just on your comments around LRP, Todd, or maybe even for Pat here. I mean, just given how you performed this year, can we expect an update to your LRP next year given that you're tracking well ahead of your plan?

Yes, Vik, we're contemplating when the right time to update it is. We do think towards the end of next year would be a good time to do that as we come into 2027 and have 2026 largely under our belt.

Your next question comes from the line of Matt Miksic with Barclays.

Congrats on a really strong quarter. Wanted to get your thoughts on the competitive landscape. Obviously, recent changes seem to have consolidated major players in spine down to about three. How do you expect this to play in your favor? What other opportunities do you see for consolidation and its implications?

We love market disruption. These developments unfold over several years and do not happen overnight. J&J's announcements illustrate this, as they discuss a 2-year transformation. Our focus remains on our unique strengths, with many catalysts to drive growth.

That's great, Pat. Then I have one on the lateral space and the role of Valence. I think you mentioned you're in the early innings. If you could talk about what kind of benefits Valence could bring in terms of efficiency for surgeons and how this would contribute to increase adoption and the expansion of prone lateral over time?

The PTP concept is ripe for increasing procedures at multiple levels. The challenge is democratizing the approach. There's always a spectrum of skill levels. The approach is promising for a broader base of surgeons to benefit patients. Navigation and robotics need proper integration into the workflow of spine procedures. Our opportunity with Valence is to architect these improvements productively. SafeOp's neurophysiology capabilities are unmatched, identifying nerve health crucial for procedures. We'll continue improving elements like the Patient Positioner, and Valence is a key part of that. Its integration supports predictable procedures, benefiting experienced and newer surgeons alike.

Pat, I think everything you mentioned highlights efficiency and predictability for experienced users, while making procedures accessible to more users who might not typically perform lateral surgeries.

Your next question comes from the line of Young Li with Jefferies.

Congrats on a very strong quarter. It looks like you had the biggest beat versus consensus in three years. Can you talk about the health of the spine market and competitive dynamics? Who are you gaining market share from during the quarter?

I think this reflects the foundation we've built over the years. The market appears stable, not much change. We're adding more surgeon users, which indicates a promising future. The expansion of new surgeons and continued success of established ones is significant. We're gaining share from several companies and are benefiting from decisions made 18-24 months ago, a lagging impact that will reflect in future quarters.

From a market standpoint, the landscape seems healthy, which benefits us. With our size and growth, it's clear we're gaining ground on all key players, which speaks to our strategy in taking share from competitors.

Can I ask a follow-up just on balancing profitability versus growth? The industry's faced disruption, which could theoretically drive faster growth but might compromise margins. You mentioned durable profitable growth; could you elaborate? How do you balance this, especially with your higher average revenue per case?

I'm going to defer to Todd for that specific detail. One thing I want to emphasize is our convoyed sales model within proceduralization, where several products are used that integrate to enhance predictability in surgeries. The surgeon's adoption of our thesis correlates with a higher ASP in procedures, which we monitor closely.

Our focus on maintaining profitability while pursuing growth underpins our long-range commitments. We're executing on our plan. Priorities include growth while investing in innovation. That entails optimizing revenue-generating assets effectively, allowing us to sustain profitability while enabling future growth. Adjusted EBITDA is strong, granting us self-funding capacity for growth. Leveraging our infrastructure combines with surgeon engagement to maintain profitability while expanding.

Your next question comes from the line of Matthew O'Brien with Piper Sandler.

This is Anna on for Matt. I wanted to ask about Valence. With the full launch nearing, what does the master order funnel look like currently? Also, could you provide context around the size of the ASC opportunity?

I expect Valence will give us decent traction. The robotic component has been in Alpha, and we're waiting for navigation to activate, which we have confidence in. Significant impact won't come until 2026, but initial demand looks promising. Valence will democratize surgery rather than serve as a capital sales opportunity; it drives surgical volume.

We plan to be deliberate in our rollout of Valence through 2026, ensuring good experiences while setting ourselves up for success.

If I can squeeze in one last question about international expansion. You're undertaking a narrow and deep approach and seem ahead of LRP targets. What is your outlook for international growth?

You're likely viewing our international breakout, which includes EOS revenue. Our long-range plan accounted for global EOS, surgical international, and U.S. surgical revenue breakdown. We're on track to achieve our commitments; $1 billion in revenue by 2027 includes $100 million from EOS, $870 million from U.S. surgical, and $30 million from international surgical revenue.

Your next question comes from the line of Allen Gong with JPMorgan.

Congrats on a good quarter. I wanted to touch on guidance. You had a strong third quarter, growing through the typical summer seasonality. Your implied guide for the year shows a smaller step-up into Q4 than traditional orthopedics. Why was this appropriate? For 2026, should we use Q4 as a benchmark?

We're raising guidance by $18 million, which feels appropriate given strong performance. Our forecasting philosophy aims to provide achievable targets with a reasonable opportunity for exceeding them. For next year, we projected around $120 million of growth. When looking at 2026, our target will likely reflect $120 million.

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

Congrats on another strong quarter. Quick follow-up on your previous commentary. With regard to LRP updates, are you feeling conservative about the current guidance as it aligns with consensus?

Yes, current consensus positions us around the track record; I'd estimate our outlook on the low end of the $120-$130 million growth expectations.

On deformity and traction from that segment, is it at critical mass, or are there product launches you expect before it reaches that level?

We are at the infancy stage concerning deformity's influence. Insights from EOS are enhancing our understanding of the potential. The opportunity to drive predictability in deformity treatment is substantial. We're launching products to aid that segment, particularly targeting idiopathic and adult cases while also working on pediatric solutions.

Your next question comes from the line of Caitlin Roberts with Canaccord Genuity.

Congrats on a great quarter. You noted discipline with sales team additions. How are you being disciplined in those hires? Do you plan to add to the capital sales team for the upcoming Valence launch?

We have developed a good process for minimizing the time to effectiveness post-hire. Given the lagging dynamics of our business, access is crucial before hiring sales personnel. We have many markets where we're new entrants, especially in the Northeast. We'll hire strategically to maximize the influence of those hires once onboarded. As for Valence, we'll add some capital sales heads but not excessively, as the system is designed for procedural ease.

Your next question comes from the line of Tom Stephan with Stifel.

I wanted to follow up on deformity. Todd, I believe you mentioned that it's an early revenue contributor. Can you provide a timeline on when to expect growth contributions from this segment?

The foundation of our approach to deformity is based on EOS and EOS Insight. We're focused on expanding the availability of EOS to impact market share—the strong correlation between our units and market share speaks volumes. Improvements in the predictability of care through information is critical. We are poised for that growth, and product innovations over the next 2-3 years will drive our influence.

I believe we can anticipate a linear trajectory of growth as we implement product innovation and fulfill our promises with EOS Insight. There's increased availability and demand for adult deformity, further supported by EOS. Our more recent entry into pediatric deformity is just beginning to yield results.

We read these trends favorably; the foundation built around lateral and the emerging capabilities in cervical and deformity point toward future catalysts for sales growth. We're primed for significant opportunities ahead.

Quick follow-up on surgeon adoption rates. The new surgeon adoption rates are strong. What’s the trajectory for this metric looking forward?

I find the growth in surgeon adoption exciting. It's an indicator for future growth but doesn’t always dictate immediate returns. Our established markets and same-store sales showing positive trends bolster our outlook for continual surgeon adoption and growth.

We see established territories experiencing growth through renewed penetration, adding more surgeons within our footprint. With our relatively low market share, there's significant room for continuing to add surgeons. Our growth rates adhere to positive ongoing trends likely continuing.

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

Congrats on the great quarter. I wanted to ask about EOS; I see strong revenues which typically reflect slower quarter for hardware sales. What are the main drivers behind this? Will it carry into next quarters as well? Are you broadening your targets beyond academic centers?

The EOS sales surge seems driven by the interest created by EOS Insight capabilities and the valuable imaging technology we deliver. The current demand spans both academic and private sectors, with opportunities extending beyond deformity solutions. We're likely to gain market relevance as we engage the academic sector further; renovations of previous pediatric installations will likely benefit from our software enhancements.

This concludes today's question-and-answer session. I would now like to turn the call back over to Pat for closing remarks.

Thanks, Lacie. More than anything, I want to thank the team for their work. It's been a great quarter. I appreciate everyone's support in our endeavors. We have a long road ahead, but the foundation is laid for future prosperity. I appreciate the team's dedication and interest.

This concludes today's conference call. You may disconnect.